```

[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]

 
   PRESIDENT'S FISCAL YEAR 2004 BUDGET WITH AN OFFICIAL OF THE U.S. 
                       DEPARTMENT OF THE TREASURY
=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 4, 2003

                               __________

                            Serial No. 108-3

                               __________

         Printed for the use of the Committee on Ways and Means

                       U. S. GOVERNMENT PRINTING OFFICE
88-642                         WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________
                                                                   Page
Advisory of January 28, 2003, announcing the hearing.............     2

                                WITNESS

U.S. Department of the Treasury, Hon. John Snow, Secretary.......     6

   PRESIDENT'S FISCAL YEAR 2004 BUDGET WITH AN OFFICIAL OF THE U.S. 
                       DEPARTMENT OF THE TREASURY

                              ----------                              

                       TUESDAY, FEBRUARY 4, 2003

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 2:08 p.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 28, 2003
No. FC-1

                      Thomas Announces Hearing on

              President's Fiscal Year 2004 Budget with an

            Official of the U.S. Department of the Treasury

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
President Bush's fiscal year 2004 budget proposals within the 
jurisdiction of the Committee. The hearing will take place on Tuesday, 
February 4, 2003, in the main Committee hearing room, 1100 Longworth 
House Office Building, beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be heard from an official of U.S. 
Department of the Treasury. However, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    On January 28, 2003, President George W. Bush will deliver his 
State of the Union address in which he is expected to outline numerous 
budget and tax proposals. The details of these proposals are expected 
to be released on February 3, 2003, when the President is scheduled to 
submit his fiscal year 2004 budget to the Congress.
      
    The Treasury Department plays a key role in many of the areas of 
the Committee on Ways and Means' jurisdiction, including taxes and 
customs.
      
    In announcing the hearing, Chairman Thomas stated: ``The 
President's budget will include tax and other proposals related to 
Treasury Department functions within the jurisdiction of the Committee 
on Ways and Means. I look forward to receiving the President's budget 
and discussing his proposals.''
      

FOCUS OF THE HEARING:

      
    The Treasury official will discuss the details of the President's 
budget proposals that are within the Committee's jurisdiction.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman THOMAS. If Members and guests could find their 
seats, please.
    Thank you. Good afternoon. We welcome Secretary Snow in his 
first appearance not only before the Committee on Ways and 
Means as Secretary of the U.S. Department of the Treasury, but 
also before the Congress. We look forward to hearing from you; 
and, more importantly in the long run, we look forward to 
working with you.
    The President has proposed an economic growth and jobs 
package among a number of other issues that are under the 
jurisdiction of this Committee. Our economy is on the right 
track, but clearly we need to act to increase individual income 
and encourage businesses to create jobs and entrepreneurs to 
take risks. I believe we must act soon.
    In recent times, taken tax action which has had a very 
positive fiscal impact. I believe that the Committee, if it is 
diligent in its work, can produce suggested changes to the Tax 
Code that may also have a considerable positive effect on the 
economy.
    To that end, the Chair would indicate to Members that the 
Chair intends to introduce legislation which would be the 
President's proposal and do so prior to the end of February. 
The Chair then intends to hold hearings through the first 2 to 
perhaps 3 weeks of March. The Chair would extend to the Ranking 
Member and to all other Members suggestions as to who would be 
witnesses. Clearly, our intent here is to hear the pros, the 
cons, and the alternatives, so that we may move forward as a 
Committee. Then, by the end of March, mark up legislation that 
the Chair anticipates would go to the Floor and pass the Floor 
of the House of Representatives prior to the beginning of 
April. The Chair intends this kind of vigorous schedule for the 
purpose of making law, if possible, as soon in the calendar 
year of 2003 as possible.
    The other issues that will appear before us are obviously 
important. One of the things the President proposed is the 
consolidation and simplification of savings vehicles for 
Americans. We have had some significant bipartisan initiatives 
in that area, and I look forward to Members of this Committee 
and the Administration, especially in the Treasury, examining 
ways in which we can encourage all Americans to save more.
    Second, I do appreciate the Administration's candor in 
declaring in their budget that the international tax regime 
known as FSC-ETI, foreign sales corporation extraterritorial 
tax income, must be repealed and replaced with a simpler 
alternative in efforts to avoid trade retaliation and improve 
competitiveness for U.S. companies. By getting over the hurdle 
of the fact that it must be done creates an opportunity for us 
to shape much-needed legislation.
    Third, the budget recommends the use of health insurance 
tax credits as a way to help the growing number of uninsured 
Americans. We made headway in last year's trade bill and are 
very interested to see how this approach might be more broadly 
applied.
    Further, I do want to acknowledge the ongoing changes at 
Treasury. This Secretary now heads a Department in transition. 
Formerly of the Treasury, the U.S. Customs Service has 
relocated to the U.S. Department of Homeland Security and the 
former Agency of Alcohol, Tobacco and Firearms, whose functions 
have now been split between the U.S. Department of the Treasury 
and the U.S. Department of Justice. We will want to monitor 
these changes, especially in hearing the successes of these 
transitions, as well as, where and if we are needed to help.
    Finally, Mr. Secretary, as a trustee of the Social Security 
and Medicare funds, we will be interested in your perspective 
on how we tackle the very serious demographic issue of 
resources versus needs or wants facing this country in these 
important programs.
    I now recognize the gentleman from New York, the Ranking 
Member, for any comments he may wish to make.
    [The opening statement of Chairman Thomas follows:]
    Opening Statement of the Honorable Bill Thomas, Chairman, and a 
        Representative in Congress from the State of California
    Good morning. We welcome John Snow in his first appearance before 
the Ways and Means Committee as the Secretary of the Treasury. We look 
forward to working with you.
    The President has proposed an economic growth and jobs package. Our 
economy is on the right track, but we must act to increase individual 
income and encourage businesses to create jobs and entrepreneurs to 
take risks. And we must act soon.
    I would also like to take note of several other proposals. The 
first is the consolidation and simplification of savings vehicles for 
Americans. This is a bold proposal that we look forward to learning 
more about.
    Secondly, I appreciate the Administration's candor in declaring in 
their budget that the international tax regime--also known as FSC/ETI--
must be repealed and replaced with a simpler alternative that will 
avoid trade retaliation and improve competitiveness for U.S. companies.
    Third, the budget recommends the use of health insurance tax 
credits as a way to help the growing number of uninsured Americans. We 
made headway on this front through last year's trade bill, and are 
interested in seeing how this approach may be more broadly applied.
    Further, I would like to acknowledge the ongoing changes at 
Treasury. The move of the U.S. Customs Service to the Department of 
Homeland Security and the former agency, Alcohol, Tobacco and Firearms, 
whose functions are now split between Treasury and the Department of 
Justice. We will be interested in hearing about the success of these 
two transitions.
    Finally, as a trustee of Social Security and Medicare, we'll be 
interested in your 
perspective on how we tackle the very serious demographic issues facing 
the country.
    I now recognize the newest Republican Member on our panel, Rep. 
Eric Cantor of Virginia, to introduce the newest Secretary of the 
Treasury . . .
    I now recognize the gentleman from New York, Mr. Rangel, for any 
opening statement he may have.

                                 

    Mr. RANGEL. Thank you, Mr. Chairman.
    Welcome, Mr. Secretary. As we had stated earlier, we do 
hope that we will begin to try to address some of the problems 
facing our Nation in a bipartisan way. We are certainly going 
to try to do this.
    We also recognize there was a time you shared our concern 
about the deficit, and we can appreciate the fact that the 
Administration obviously has a different view on that today. It 
does not go unnoticed that the suggested tax cut by the 
President and by you is moving the Nation away from getting 
revenues from dividends, that is, unearned revenues to the 
working class people. We have been accused of declaring class 
warfare, and I personally do believe that is exactly what we 
are going through as we see the people paying payroll taxes to 
Social Security and Medicare. These taxes are being used not to 
protect the Social Security system, but rather for a tax cut.
    We also have a concern, even though we are Federal 
legislators, about the impact this tax cut is going to have on 
our States and local governments. So, it is really surprising 
that, before we even know the cost of this war that appears to 
be eminent from our viewpoint, that we are talking about a $1.5 
trillion tax cut which was similar to the one we addressed 
earlier, and the relationship between that tax cut and our 
ever-increasing deficit.
    So, I look forward to your testimony to see what optimistic 
spin you can give to this since most economists have agreed 
that, notwithstanding the size of our economy, that these 
deficits could prove to be devastating, especially as we look 
forward to the cost of the war that appears to be imminent. So, 
we look forward to working with you publicly and privately and 
hope we can reach some bipartisan agreement on the budget and 
the tax part of it. Thank you.
    Chairman THOMAS. I thank the gentleman. Mr. Secretary, on 
behalf of the Committee, I welcome you. On a more personal 
note, I would like to recognize the gentleman from Virginia for 
an introduction.
    Mr. CANTOR. Thank you, Mr. Chairman. I am delighted to 
welcome a fellow Virginian and my friend and my constituent, 
Secretary John Snow, to today's hearing.
    Mr. Chairman, in the words of some of the country's most 
respected editorial writers, there are few minds better than 
John Snow's to help put America's economic engine back on 
track.
    I think you will hear today that Mr. Snow holds sound 
fiscal views; and he is a proven leader, having served most 
recently for 14 years as President and Chief Executive Officer 
of the Richmond-based CSX Railroad Company. In my view, the 
President could not have picked a better individual to lead the 
Treasury Department.
    Mr. Chairman, once again, thank you for allowing me to 
welcome the Honorable John Snow. It is my distinct pleasure.
    Chairman THOMAS. Mr. Secretary, any written testimony you 
have will be made part of the record. You can address this 
Committee in any way you see fit. I will tell the gentleman, 
you need to turn the microphone on. They are very, very uni-
directional. You need to speak directly into it.

     STATEMENT OF THE HONORABLE JOHN SNOW, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. SNOW. Thank you very much, Mr. Chairman, Ranking Member 
Rangel, all Members. It is a pleasure to be here for my maiden 
testimony in this new role that I assumed just yesterday. I 
hope my knowledge will expand rapidly in the weeks and months 
ahead, but I must say you probably have me at a pretty good 
disadvantage today.
    Mr. Chairman, Ranking Member Rangel, distinguished Members 
of the Committee, I truly do welcome the opportunity to appear 
before you today to discuss the President's budget for the 2004 
fiscal year.
    Let me begin by offering some views on what I would regard 
as the essential background for the budget; and that, of 
course, is the state of the U.S. economy today and the 
President's economic growth plan, which in my view promises to 
create lots of new jobs and good jobs, promises to accelerate 
America's economic recovery, and to increase our growth for 
years to come, to put America on a higher growth path for the 
out years.
    As every American knows, whether from having lost a job, or 
knowing someone who has lost a job, or worrying about losing 
their job, the economy took a turn for the worse beginning 
sometime in the summer of 2000. I remember it well as I looked 
at the carload and container load and truckload numbers at my 
old company, and saw them take a precipitous downward move.
    By the time the President took office, there was a strong 
undercurrent running against the economy. The unprovoked and 
the unprecedented terrorist attacks of September 11 compounded 
a recession that by then was already well under way, while 
about that time we began to discover a series of abuses of 
trust of a major proportion by some corporate business leaders 
that slowed our economy and eroded confidence in our capital 
markets.
    In response to this confluence of adverse events, the 
President acted decisively and in a bipartisan fashion with the 
Congress. He took the steps necessary to protect a Nation that 
was shaken and a Nation that had at that point, a fragile 
economy. In 2001, when relief was needed, he signed the most 
sweeping tax relief in a generation. As evidence of the damage 
became clearer, he acted again in March 2002, to further 
bolster the economy, again with your help.
    These were precisely the right medicines at precisely the 
right time. These actions made the recession much shorter and 
shallower than it otherwise would have been. In fact, by most 
measures, the recession was the mildest since World War II.
    In the face of extreme adversity, our economy, like our 
Nation, remains resilient today. Despite a sequence of economic 
slowdown, attack on the homeland, war in Afghanistan, and 
weakened investor confidence, the economy is recovering. As the 
President has stated, we can and we must do better. Relative 
success is not enough. Too many Americans are out of work 
today, too many Americans are insecure about their future, and 
the economy is not accelerating as fast as it should.
    We must build on our proven strengths. We must continue to 
move toward policies that create more good jobs and raise the 
standard of living for all. As long as there are Americans who 
want a job and Americans who cannot find one, the economy, in 
my view, is not growing fast enough. That is why the 
President's jobs and growth package is so important. Under the 
President's proposal, 92 million taxpayers and their families 
would receive a tax cut in 2003. A typical family of four with 
two earners and a combined income of about $39,000 would get 
tax reductions of about $1,100--and not just in 2003, but in 
every year thereafter, in each and every year thereafter. His 
plan will create hundreds of thousands of additional jobs by 
the end of this year and well over 1 million by the fourth 
quarter of next year.
    This package will not only help Americans return to our 
economic potential, it will increase it. It will take us to a 
higher level of potential, creating a more abundant future with 
more good jobs and rising real wages. I believe that is what 
everyone in this room and everyone across America wants to see 
happen.
    Before I turn to the budget, a word about deficits. We are 
concerned about deficits. We have to be. Deficits matter. They 
are never welcome. There are times such as these when they are 
unavoidable, particularly when we are compelled to address 
critical national needs.
    It is important to remember, and this is a key point, that 
even without the President's economic growth and jobs package, 
without homeland security and the war on terrorism, without any 
of these, we would have deficits now. Are these deficits 
welcome? No. Are they understandable? Yes.
    The surpluses we enjoyed were the product of a strong 
economy, not a weak one. We will not return, we will never 
return to economic strength by taxing our economy when it is 
struggling, any more than we would increase our Nation's 
security by failing to fund defense when we are threatened. The 
prescription for returning to balanced budgets, to getting on 
the right path, is straightforward: hold the line on spending 
and grow the economy. Give the economy the boost it needs.
    This is the direction the President has chosen. It is a 
course to create jobs that last, permanent jobs. We are not 
going to let terrorism and its effects bring our Nation or our 
economy to its knees.
    Finally, we should remember that the current deficits are 
small relative to the unique circumstances we face today and to 
the size of our economy as a whole. Even at their depth, they 
remain considerably below the typical levels following a 
recession over the last 30 years, and they begin a pronounced 
improvement after next year and will be declining both in 
absolute terms and in relative terms.
    Clearly, we face new threats and challenges. Job creation 
and economic growth are keys not only to the near term but to 
our long-term success, as well. If we are to meet the threats 
of today and the challenge of tomorrow, we simply must have a 
strong economy.
    In fact, we must seek a higher level of prosperity than any 
we have known before, one which puts us on a higher growth path 
and one which unlocks the fullest potential and talents of the 
American people. That means encouraging hard work, rewarding 
hard work, and creating opportunities for all Americans to 
work. These are the values that have brought us to where we are 
today, and they are the ones that must lead us to a better 
tomorrow. We must also remember that our success and our 
example in this endeavor promises not only a brighter, better 
future for our people and our children, but for the rest of the 
world, as well.
    The jobs and growth package, our new initiatives to promote 
savings, to promote health care coverage, to promote charitable 
giving, to encourage responsible energy production and improved 
compliance measures for the Internal Revenue Service are also 
important parts of these budget initiatives.
    Mr. Chairman, I look forward to discussing that plan and 
the rest of the President's budget with you today. Thank you 
very much.
    [The prepared statement of Mr. Snow follows:]
Statement of the Honorable John Snow, Secretary, U.S. Department of the 
                                Treasury
    Chairman Thomas, Ranking Member Rangel, and distinguished Members 
of the Committee on Ways and Means, I welcome the opportunity to appear 
before you today to discuss the President's budget for fiscal year 
2004.
    Let me begin by offering my views on the essential background for 
this budget: the United States economy and President Bush's economic 
growth plan, which promises to create jobs, accelerate America's 
economic recovery, and increase our growth for years to come.
    As every American knows by now--whether from having lost a job, 
knowing someone who has, or worrying about losing theirs--our economy 
took a turn for the worse beginning in the summer of 2000. By the time 
President Bush took office an undercurrent was running against the 
economy. The unprovoked and unprecedented terrorist attacks of 
September 11, 2001 compounded a recession that was well underway, while 
the discovery of serious abuses of trust by some corporate business 
leaders slowed our recovery from it.
    In response to this confluence of adverse events, President Bush 
led decisively. Acting with Congress in a bipartisan fashion, he took 
the steps necessary to protect a shaken Nation and a fragile economy. 
In 2001 when relief was needed, he signed the most sweeping tax relief 
in a generation. As evidence of the damage became clearer, he acted 
again in March 2002 to further bolster the economy. These were 
precisely the right medicine at precisely the right time. These actions 
made the recession shorter and shallower than it would have been. In 
fact, by most measures it was the mildest since World War II.
    In the face of extreme adversity, our economy, like our Nation, 
remains resilient. Despite a sequence of economic slowdown, attack on 
our homeland, war in Afghanistan, and weakened investor confidence, the 
economy is recovering. But as the President has stated, we can and must 
do better. Relative success is not sufficient. Too many Americans are 
out of work today, and too many Americans are insecure about their 
tomorrow.
    We must build on the proven strengths of our economy. We must 
continue to move towards policies that will create more good jobs and 
raise living standards for all. As long as there are Americans who want 
a job and can't find one, the economy is not growing fast enough. 
That's why President Bush's jobs and growth package is so important. 
Under the President's proposal, 92 million taxpayers and their families 
would receive a tax cut in 2003. A typical family of four with two 
earners making a combined $39,000 will receive a total of $1,100 in tax 
relief, compared to the taxes they paid in 2002, under the President's 
plan--and not just this year, but in each and every year after. And his 
plan will create hundreds of thousand of additional jobs by the end of 
this year and well over a million more by the end of next year.
    The package will not only help America return to its economic 
potential, it will increase it, creating a more abundant future with 
more good jobs and rising real wages. I believe that is what everyone 
in this room and across America seeks.
    Before I turn to the budget, a word about deficits. Deficits 
matter. They are never welcome. But there are times, such as these, 
when they are unavoidable, particularly when we are compelled to 
address critical national needs. It is important to remember, even 
without the President's economic growth and jobs package, homeland 
security, and the war on terrorism, we would have deficits now. Are 
these deficits welcome? No. Are they understandable? Yes.
    The surpluses we enjoyed were the product of a strong economy, not 
a weak one. We will not return to economic strength by taxing our 
economy when it is struggling, any more than we would increase our 
Nation's security by failing to fund its defense when it is threatened. 
The prescription for returning to balanced budgets is straightforward: 
hold the line on spending and grow the economy. This is the direction 
the President has chosen: a course to create real jobs that last. We 
are not going to let terrorism and its effects bring either our Nation 
or our economy to its knees.
    Finally, we should remember that current deficits are small 
relative to our unique circumstances and to our economy as a whole. 
Even at their depth, they remain considerably below the typical levels 
following a recession over the last 30 years and they begin a 
pronounced improvement after next year.
    We face new threats and challenges. Job creation and economic 
growth are keys not only to our near-term but our long-term success as 
well. If we are to meet the threats of today and the challenges of 
tomorrow, we must have a strong economy. In fact, we must seek a higher 
level of prosperity for America than we have known--one which puts us 
on an even higher growth path, one which unlocks the fullest potential 
and talents of the American people. That means encouraging hard work, 
rewarding hard work, and creating the opportunities for work for all 
Americans. These are the values that brought America to where we are 
today and they are the ones that we must allow to lead us into the 
future. We must also remember that our success and our example in this 
endeavor promises not only a brighter, better future for our people and 
our children, but for the rest of the world as well.
    The Jobs and Growth Package, our new initiatives to promote 
savings, our proposal to promote health care coverage, to encourage 
charitable giving, and to promote responsible energy production, and 
improved compliance measures from the Internal Revenue Service are all 
important budget initiatives. Each of these is described in more detail 
in our request.
    The Treasury Department's portion of the 2004 budget is nearly a 
third reduced from 2003, owing mainly to the separation of homeland 
security functions from the Treasury Department this year. Adjusting 
for that change, Treasury's request is an increase of about 3.5% over 
last year's request.
    Treasury's budget request will allow us to build on our recent 
accomplishments and highlights our commitments to:

    1. LFight the war against terrorist financing;
    2. LEnsure that the tax system is fair for all Americans through a 
comprehensive compliance effort that includes high income taxpayers;
    3. LIncrease Treasury's efficiency and effectiveness by 
streamlining operations; and
    4. LMaintain the integrity of our Nation's financial systems and 
currency.

    I look forward to discussing that plan and the rest of the 
President's budget with you today.

                                 

    Chairman THOMAS. Thank you very much, Mr. Secretary. I do 
want Members to note that the Chair has placed himself on the 
clock so that Members will be mindful of the time available to 
them and that we can expeditiously question the Secretary, and 
the questions would come from all Members of the Committee if 
time possibly permits.
    Mr. Secretary, your job prior to coming to this particular 
position is a very useful and important one because we often 
get wrapped up in academic discussions of effects. The 
President has proposed a number of changes to the Tax Code and 
you yourself recently used the phrase that those changes would 
have an effect ``each and every year thereafter.'' When dealing 
with tax changes, speaking perhaps more from your previous 
position than your current position, what is the impact of 
permanent versus temporary?
    Mr. SNOW. The difference, Mr. Chairman, between permanent 
and temporary is the difference between night and day. With 
permanent tax changes, businesses and individuals can plan for 
the future. They build into their current behavior the 
expectation of that higher aftertax income, greater disposable 
income that they will have in the future. If they are a 
business, they build into the business today the plans into the 
future for higher returns on their investments, higher net 
income. That leads them to invest more today. It leads 
consumers to consume more today.
    A critical feature of the President's bill is the multi-
year character of it, because it causes people today to begin 
to change their behavior today in ways that are helpful to the 
economy.
    Chairman THOMAS. Obviously, there are portions of the 
President's plan that are more far-reaching than others. If you 
were to identify those that are most critical for permanence, 
which would you identify?
    Mr. SNOW. The package I think works as a whole, but the 
centerpiece of it is the acceleration of the tax rate 
reductions from 2004 and 2006 to 2003, and the dividend 
provision. The dividend provision in my view is the real 
centerpiece of this legislation. It is good economics, it deals 
with a major distortion in economic behavior, and eliminating 
that distortion will promote long-term growth and will promote 
jobs and economic activity.
    Chairman THOMAS. Most often it has been said that, first of 
all, you want the changes and you want them to be permanent. We 
have, however, in the past and in the most recent tax bill made 
changes that were not permanent specifically in areas which 
allow business to make decisions today rather than tomorrow. 
The Chair would be the first to say that if we could make 
permanent changes in areas, especially of those depreciable 
assets of less than 5 years, it would be a giant stride 
forward. In the area of, for example, identifying small 
business as the President does in one of the sections of the 
Code, so-called section 179, what would be, if we are unable to 
make it permanent, a reasonable and appropriate timeframe to 
see behavior modified in the short term. With the intent to 
acquire equipment and workers to help stimulate the economy?
    Mr. SNOW. The longer, in my view, is always the better. 
Something like a 5-year timeframe would seem to make sense to 
me, to give businesses an opportunity to plan ahead and know it 
is going to be there. It is the permanency of the concept, that 
it is there and available, that causes businesses to respond. 
So, something along those lines. I think time periods are 
fairly arbitrary, Mr. Chairman.
    Chairman THOMAS. When we use the phrase ``stimulus versus 
long-term growth,'' in your opinion is it better to spend a 
greater amount of money now, notwithstanding the current budget 
situation, to lock in the longer term, than to save money and 
do it only for a short period of time? Where is the real 
savings?
    Mr. SNOW. I would strongly come down on the side of long-
term growth, investing now for long-term growth. As you know, 
looking at the problems the country faces in the years ahead, 
the surest way for us to equip ourselves to deal with those 
issues, Medicare funding, Social Security funding, the 
flexibility to respond to international crises, that is best 
provided for with a strong and buoyant and large economy.
    Chairman THOMAS. I thank the gentleman. My time has 
expired. The gentleman from New York, does the Ranking Member 
wish to inquire?
    Mr. RANGEL. Thank you, Mr. Chairman. Welcome again, Mr. 
Secretary. Is it safe to say under the President's proposal 
that the surplus in the Medicare Trust Fund and the Social 
Security Trust Fund will be completely wiped out?
    Mr. SNOW. No, Mr. Rangel, that would be a misstatement of 
the results of the President's growth and tax plan.
    Mr. RANGEL. Well, the moneys that are being paid into the 
trust fund, they will not be in the trust fund. Would they not 
be transferred to the general fund?
    Mr. SNOW. Every penny of trust fund surplus will be 
credited to the trust fund.
    Mr. RANGEL. It will be credited, but it would be used--the 
actual money will be used to reduce taxes, would they not?
    Mr. SNOW. No, Mr. Rangel. The integrity of the Social 
Security system, the integrity of the Medicare system, remain. 
Ultimately, in a pay-as-you-go system, the integrity of that 
system depends upon the success of the economy. It is a pay-as-
you-go system.
    Mr. RANGEL. I thought that the majority had convinced you 
that, in order to maintain the integrity of this system, the 
money would have to be placed in a lockbox. Do you remember 
that expression, a ``lockbox?'' That was supposed to protect 
the integrity of the system. Are you saying now we don't need a 
lockbox to protect the integrity of the pay-as-you-go system?
    Mr. SNOW. No, I don't think you do at all. The lockbox 
really comes down to paying down the Federal debt. This is the 
wrong time to be doing that. There are reasons, legitimate 
reasons, why we have a deficit today. We have a deficit 
primarily because we have come through a very significant 
recession and fall-off in revenues, Federal revenues, because 
of the collapse of the stock market, a period where options and 
bonuses and corporate compensation levels have dropped 
significantly.
    It was capital gains and bonuses and incentive compensation 
that pushed up in a surprising way the government revenues in 
the late nineties. I was as surprised as anyone else to see 
those government revenues go up, but they were really a direct 
reflection of the stock market, the buoyant stock market and 
options and incentive pay plans.
    Mr. RANGEL. Is the reform of the Social Security system as 
you understand it off of the agenda now?
    Mr. SNOW. No, I think the President is committed to reform 
of Social Security.
    Mr. RANGEL. The Office of Management and Budget (OMB) gave 
an estimate of $1 trillion in order to so call reform it, or 
some say privatize it. Would that estimate still exist today?
    Mr. SNOW. Mr. Rangel, I am not familiar with the number you 
are citing, but any reform of Social Security is going to 
require some infusion of some kind, higher savings rates within 
Social Security. Longer term, we have to find a way to sustain 
it, and that means more--that means some set of reforms that 
put it on a sounder financial footing.
    Mr. RANGEL. Have you given any consideration of the impact 
of the projected tax cuts on local and State governments, 
whether they should expect a reduced source of revenue as a 
result of this proposal?
    Mr. SNOW. I have looked at some analyses on that, Mr. 
Rangel, and the net of the reductions and the gains is about a 
wash from the numbers I have seen, maybe slightly positive.
    Mr. RANGEL. Have you heard from the Governors on this issue 
as to what they believe the impact would be on their tax 
systems?
    Mr. SNOW. No, I have not at this point. I have only been in 
office a day, though.
    Mr. RANGEL. I was under the impression there were some 
people there before you that may have shared their knowledge 
with you. We will look forward to working with you, Mr. 
Secretary, and I thank the Chairman for this time.
    Chairman THOMAS. I thank the gentleman for staying within 
the timeframe. The Chair now recognizes the gentleman from 
Illinois, Mr. Crane, if he wishes to inquire.
    Mr. CRANE. Yes, indeed. Mr. Secretary, congratulations and 
thank you for being here today. I look forward to working 
closely with you this year as we work to implement the 
President's growth package, but I also want to express 
appreciation to you going back some years when you were 
Chairman of The Business Roundtable. I serve as Chairman of the 
Subcommittee on Trade, and you played a very key role in 
helping us get the passage of the North American Free Trade 
Agreement. It was a critically important piece of legislation, 
and you marshalling the troops out there in the business 
community was a very important act.
    I want to just make one question, but before getting into 
that, I did not realize you were from Toledo. When you were in 
high school, I was in the real estate business down in Toledo 
briefly for about half a year. I am sorry I missed seeing you 
back in those days.
    The one question I have is the President's budget provides 
for the permanent extension of the tax relief that was included 
in the 2001 tax cut. There are some who claim that the cost of 
permanently extending that tax relief would increase government 
debt and lead to higher interest rates in the future. Is that 
true, or is that not true, and why or why not?
    Mr. SNOW. Well, there would, of course, be some cost 
associated with making those tax changes permanent, but, for my 
money, there would be an even bigger economic cost associated 
with not making them permanent. Because by not making them 
permanent, we would--the tax on low-income families would go up 
50 percent or some number like that. The marriage penalties 
would be restored, and the advantages of the child credit would 
be lost.
    I can't give you the budget impact of making it permanent, 
but I think it is unthinkable that we would ever take tax rates 
up to that prior level. If the American business community or 
the citizens of the country ever thought the rates were going 
back to that level, I think we would have a disaster on our 
hands.
    Mr. CRANE. Well, thank you, Mr. Secretary. I look forward 
to working with you. I yield back the balance of my time.
    Chairman THOMAS. I thank the gentleman. Prior to 
recognizing the gentleman from California for the purpose of 
relinquishing his time, I understand, the Chair would urge 
Members to speak directly into the microphone. The Chair is in 
hopes of refurbishing the 1950 sound system that we have in 
this room prior to the end of this session. Similarly, as we 
had difficulty in hearing the Secretary initially, I do believe 
the audience as well as others would prefer to hear clearly 
what the Members have to say.
    With that, the Chair recognizes the gentleman from 
California, Mr. Stark.
    Mr. STARK. Thank you, Mr. Chairman. In the spirit of the 
newest Member of the Administration, I would like at this time 
to yield my time to the newest Member on our side of the aisle, 
the gentlewoman from Ohio, Ms. Tubbs Jones.
    Chairman THOMAS. Ms. Tubbs Jones, you are recognized for 5 
minutes.
    Ms. TUBBS JONES. I love you, Mr. Stark. Mr. Chairman, 
Secretary Snow, good afternoon.
    Mr. SNOW. Good afternoon.
    Ms. TUBBS JONES. In Ohio, our Republican Governor just 
released a 2-year, $49.2 billion budget that he said contained 
very little good news. In fact, it contains $3 billion in tax 
increases. It includes tacking on an additional 5 percent sales 
tax onto services like dry cleaning, manicures, cable TV, life 
entertainment, and increases fees for hunting and fishing 
licenses. Many Ohioans would see their Medicaid coverage cut, 
food banks will no longer be able to count on State moneys, and 
other social services will suffer, which in turn will hurt the 
people that depend on those services most.
    In my congressional district in Cleveland, the Mayor just 
announced a plan to raise $10 million by increasing most of the 
fees charged by the city, things such as birth certificates, 
building permits, housing inspections and taxicab licenses. 
Even with these increases Cleveland might not be able to match 
the cost of providing these services.
    The financial straits of Ohio and Cleveland are not unique. 
Most of the States and many of the major cities across this 
country are facing similar lean times and being forced to 
respond to this in cuts and services and increases in fees, 
just to barely keep their heads above water.
    I heard you say previously, sir, that you believe that the 
dividend tax cut would have a significant influence on 
assisting States and governments. Can you kindly tell me what 
impact the dividend tax cut has on the low-income housing tax 
credit, sir?
    Mr. SNOW. It is the tax package as a whole that I was 
referring to in saying that the effects are slightly positive 
from the analysis I have seen. That comes from the fact that 
the package as a whole induces growth, creates growth in the 
economy that would not be there otherwise, and that higher 
growth in the economy will generate additional State and local 
revenues.
    Ms. TUBBS JONES. Have you read then, sir, that in fact the 
dividend tax cut will in fact repeal the low-income housing tax 
credit?
    Mr. SNOW. I don't think it repeals it.
    Ms. TUBBS JONES. Not in fact repeals, but in actuality will 
repeal it.
    Mr. SNOW. I have looked at that issue of the effect of the 
dividend on dividend exclusion on other tax-favored forms of 
investment, and I don't think there--there may be some effect 
as people who now find equity investments are a little more 
attractive than they were before, or somewhat more attractive, 
will shift into equities and out of some other kinds of 
vehicles, but I don't think it will be dramatic.
    Ms. TUBBS JONES. Let me say this, Mr. Secretary. I would 
appreciate if you would, since it is your first day, not guess 
about that, because I am hearing from people all across this 
country that the dividend tax cut will have a significant 
impact on low-income housing credit; and particularly in these 
days and times when housing is so important to so many 
Americans it would be important that you, as the Secretary of 
the Treasury, understand that.
    Let me move on. I only get 5 minutes, so I have to move 
very quickly. Let me ask you, sir, in the President's budget, 
is there a line item for the cost of the war in Iraq?
    Mr. SNOW. I don't believe there is.
    Ms. TUBBS JONES. Can you, sir, or have you in fact 
discussed this issue with the President of the United States, 
and can you say to the American public any guess or estimate or 
guesstimate on what that cost will be and the impact it will 
have on our economy, sir?
    Mr. SNOW. Of course, it is the President's hope there will 
not be a war and that Saddam Hussein will give up the weapons 
of mass destruction in a peaceable way and abide by the U.N. 
resolution. So the plan, the hope, is to get Saddam Hussein to 
live by the international law, which would avoid a war.
    Ms. TUBBS JONES. I hate to cut you off, but I am almost out 
of time. Can you answer my question specifically?
    Mr. SNOW. Have I talked with the President of the United 
States about the cost of the war? No.
    Ms. TUBBS JONES. I asked you what was the cost of the war, 
sir.
    Mr. SNOW. I don't know that there will be a war, so I don't 
have an answer to that question.
    Chairman THOMAS. The Chair would indicate to any Member 
they may submit questions in writing. It is oftentimes, within 
the timeframe of the hearing, impossible to achieve full and 
complete answers. As to whether or not we are at war with Iraq, 
an answer to that may be supplied fairly quickly. Does the 
gentlewoman from Connecticut wish to inquire?
    Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman.
    Welcome, Mr. Snow. It is a pleasure to have you, Mr. 
Secretary. I just want to make a couple of comments, because 5 
minutes is not time enough to lay on the table the questions 
that I have about some aspects of the President's proposal.
    I do welcome the President having taken on one of the major 
concerns or one of the major issues that we must all be 
concerned about in the Tax Code. I don't think it is the one I 
would have taken on first, but this Committee has had testimony 
from more than 2 years, I think the earliest testimony goes 
back 3 years, as to how the American Tax Code is literally 
pushing companies offshore.
    We have heard more about that last year. Our Tax Code is 
not only making us noncompetitive, it is motivating American 
companies to move abroad; and, almost worse than that, it is 
resulting in the majority of mergers between foreign and 
domestic companies, resulting in foreign ownership.
    The implications of that surge of foreign ownership over 
jobs, over where research and development is done, over where 
development takes place and over ultimate control of profits, 
is something I think ought to concern all of us. So, not only 
am I concerned about the World Trade Organization's decision in 
regard to the way we tax foreign income and the necessity, as 
the Chairman noted in his opening remarks, for us to change 
that law, but I am also very concerned about the degree to 
which our Tax Code is making our biggest producers 
noncompetitive. If they die, so do little guys.
    So, I am pleased to see the President take on a serious 
issue like the double taxation of dividends. I am concerned the 
way the proposal is structured will actually eliminate the 
incentive for companies to participate in the low-income 
housing tax credit, which has been a primary mover of the 
building of high-quality, affordable rental housing. I am very 
much afraid it will impact the research and development tax 
credit, which is important to our companies in this 
international competitive environment. I am very concerned it 
will have an impact on the annuity industry, which has been a 
very good actor in giving people a way to provide retirement 
security for themselves to complement rather modest Social 
Security benefits. So, there are a lot of things I think we 
need to look closely at.
    I did want to say that this issue of competitiveness and 
whether or not our manufacturing sector is going to survive is 
very much on the top of my mind. I do believe if we don't take 
some significant action in support of basic manufacturing, 
tool, die, precision machining in the very near future that we 
will not have the core manufacturing base that you need to 
defend yourselves or to have a strong economy.
    I have been meeting with producers extensively, and I am 
pretty conscious now and involved in the interrelationship 
between these competitive issues that this Committee has looked 
at in the last few years and their impact on the big actors, 
the steel decision's impact on the little actors, and the 
really extraordinary fragility right now of small manufacturing 
in America. So, there are some priorities that I hold higher 
than eliminating the double taxation of dividends, though I 
understand in the long run we can't be the only country in the 
world that double taxes dividends.
    Mr. SNOW. I appreciate those comments and look forward to 
discussing a number of those subjects with you. You make a 
number of very good points.
    The case for the dividend exclusion is almost overwhelming. 
Every other country--we have the highest tax on dividends of 
anybody but one other major country in the world. It leads to 
higher debt ratios than otherwise would be the case. Debt-to-
equity ratios in America are higher than they otherwise would 
be. In a period when we are anxious to get good corporate 
governance, an essential element of good corporate governance 
is revealing to shareholders what the earning power is. You 
can't fudge cash or cash dividends.
    You mentioned inversions. One aspect of making dividends 
not taxable, of course, is if it is not taxable, what is the 
point of trying to avoid it, and on and on.
    I have not met one economist who doesn't say this makes 
good economic policy sense. I haven't met one economist who 
does not say the current Tax Code encourages over-reliance on 
debt. I haven't met one economist who has not said that this is 
good, sound, strong economic policy which promotes growth 
because it lowers the cost of equity capital. If it lowers the 
cost of equity capital, we will have more equity capital. You 
will have more of everything that you drop the price of. Having 
more equity capital means growing the economy a little faster, 
and that means jobs.
    Mrs. JOHNSON OF CONNECTICUT. Thank you. Our time has 
expired.
    Chairman THOMAS. Does the gentleman from California, Mr. 
Matsui, wish to inquire?
    Mr. MATSUI. Yes. Thank you very much, Mr. Chairman. 
Welcome, Secretary Snow. Thank you for your kindness.
    This is not part of my question, but I might add that I 
don't know if it really does reduce the cost of capital in 
reference to the double tax of dividends elimination, because I 
think the Administration, irrespective of what one thinks about 
dividend deductions or the dividend non-taxability, it should 
really go to the corporation rather than the individuals. That 
would be the way to make sure that you would lower the cost of 
capital. The way you are doing it probably has very little 
impact on both the market--the stock market, that is--and 
obviously also on the cost of capital. That is an issue I will 
leave for another day. What I really want to get into, if I 
may, is the whole issue of deficits.
    I read your testimony, and I heard your testimony. On page 
2, in the third paragraph, where you start ``Before I turn to 
the budget, a word about deficits,'' I just would like to 
randomly quote a few comments here. You say, ``Deficits matter. 
They are never welcome.'' Then you say again, ``Are these 
deficits welcome? No. Are they understandable? Yes.'' Then you 
say, ``Finally, we should remember that current deficits are 
small relative to our unique circumstances and our economy as a 
whole.''
    Now I read your statement that you made in November, on 
November 13, 1995, in the Richmond Post Dispatch. You say, 
``Credible, sustainable reduction in Federal deficits leading 
to a balanced budget will bring major economic benefits.'' Then 
you also state in that same article, ``A balanced Federal 
budget is the best choice to ensure a bright future for the 
Nation's economy.''
    Of course, Mr. Greenspan has said the same thing. He has 
stated, ``History suggests that our abandonment of fiscal 
discipline will eventually push up interest rates, crowd out 
capital spending, lower productive growth and force harder 
choices in the future.''
    Now, the reason I find the 1995 Richmond Post Dispatch 
statement of yours rather interesting is because I really do 
believe you believe it. You are a businessperson. You know what 
makes the economy run. You know, obviously, about what makes 
the financial markets work.
    At that time, when you made that observation in your 
comment in the newspaper, the percentage of the Federal budget 
deficit in relation to the Gross Domestic Product (GDP) of the 
economy was 2.2 percent. We were in 1995 on a trend line moving 
to reduce the deficit. There was a real effort by the President 
and by the Congress to reduce the budget deficit.
    What I see here is in the opposite direction. One, it 
doesn't appear there is an effort to reduce the deficit. In 
fact, we just said we got a $308 billion deficit this year and 
we will have a $304 billion deficit next year and deficits for 
at least the next 5 years exceeding $1 trillion. In addition to 
that, the deficit for this year is not 2.2 percent as a 
relation to GDP, but it is 3 percent. So if it applied to 1995, 
when it was 2.2 percent of GDP, and now it is 3 percent of GDP, 
why is it not a problem and it was a problem then?
    At that time, if you recall, we were moving out of 
recession as well. We were probably out of it, but we were 
still in a period of sluggish growth and it wasn't really until 
about a year later that we actually saw the recovery truly take 
place. It seems to be inconsistent. I think you probably owe 
the American public a little better explanation than in a three 
paragraph statement about deficits.
    Mr. SNOW. Let me try and address that question. It is 
absolutely a fair and appropriate question. In the nineties, 
the early nineties up through 1995, I was quite concerned about 
the direction, and I am sure many of you were, that deficits 
were taking in the United States. We didn't have a war. We had 
a reasonably strong economy by 1993 and 1994.
    Mr. MATSUI. If I may interrupt, I apologize, but you are 
not including in your numbers the war in your numbers, not the 
Iraqi war.
    Mr. SNOW. No, no, but we do have a war on terrorism. We 
have had a response to September 11, and we have had a dramatic 
fall-off in Federal revenues, a dramatic fall-off. It fell off 
as unexpectedly as it began. I don't think anybody foresaw the 
explosion of Federal revenues that began in, oh, the late 
nineties, 1997 and 1998, as the stock market exploded and those 
options in that buoyant time began to pay off and incentive 
compensation paid off and we had a surge in Federal revenues 
like we had never seen before.
    That surge is gone. The economy has been through a rough 
patch. I think something like, oh, the sixties--Mitch Daniel 
will be here and have the charts to show this. Far and away the 
biggest part of this deficit is explained by the economic 
slowdown, fall-off, the combination of the fall-off in revenues 
because of the stock market and options and incentive 
compensation and the decline in Federal revenues as a 
consequence of the recession.
    So I think the circumstances are very different. I will 
agree with the basic premise. If we ever get to the point where 
financial markets foresee sizable deficits without fiscal 
discipline as a centerpiece of governmental policy, where those 
deficits are rising in absolute terms and as a percentage of 
GDP, the markets will respond.
    Chairman Greenspan is right. At some point, if that is 
where the market saw us going, they would exact a price in 
terms of higher interest rates. I am saying we are a long way 
from there now. We can manage these deficits, particularly 
because they are explained by urgent national priorities and 
because there is a commitment to have them shrink over time and 
go down, as I am confident they will.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from Michigan wish to inquire?
    Mr. LEVIN. Yes. So let me follow up, Mr. Secretary. 
Welcome. Like Mr. Matsui and I think everybody else, I read 
your testimony about deficits and your minimizing them. By the 
way, on dividends, you have never met or heard of an economist 
who disagrees with you. I will send you a list; and if you 
don't mind, I will make it public because your statement is 
public. For anyone to think that there is a unanimous view of 
economists on this subject is really ignoring what a lot of 
economists have to say.
    Back to the deficit. You really minimize it. You indicate 
that historically the deficits are less than usually true; that 
the recession--you tend to minimize the recession, at one point 
congratulating the President on his efforts that pulled us out 
of the recession, though I think we are still in it. Then you 
talk about the dramatic drop in receipts as if the recession 
wasn't so mild.
    I want everybody to go back through history and look not at 
the rhetoric, if I might say so, but at the record. I think 
what one sees is that the deficit now, as Mr. Matsui has 
pointed out, is well above where they were when you made your 
comments in 1995. When you say they are headed down over a long 
period of time, or over the years ahead after next year, I 
think people are not being realistic, because so much of the 
expenditures aren't included in these budget estimates, 
including the cost of a war if it occurs.
    I went back over the last 30 years in terms of deficits, 
and I hope everybody will look at them, deficits, in 
relationship to GDP. What one finds is that--we are talking 
about usually 1 percent, 2 percent of GDP, and then they go up. 
Often they go up not after a major recession like the sixties, 
where we are talking about the early sixties they were in 1 
percent, nine-tenths of a percent. They go up in the eighties 
when there is a recession, but also when we had the supply-side 
economics tax cuts. Those deficits continued despite what were 
supposed to be sparked in terms of economic growth, and now we 
are back at it again. We had tax cuts a couple years ago, and 
the deficits are increasing. Now, the proposal is another $600 
to $700 billion, plus the cost and interest, and you just throw 
away your precautions of some years ago.
    So, I want everybody to look at the exact figures over 
these last 30 and 40 years. I don't think that they 
substantiate your statement regarding they are low relating to 
recessions, and they don't take into account the cuts in taxes 
in the eighties that led to these deficits, or was one reason. 
Economists say at least a third if not more of our present 
shortfall is because of the recent tax cuts. You just disregard 
that.
    So, we read back your words not because we want you to eat 
crow 3 or 4 years from now, but because we want some sound 
policies next year as well as this year. So, tell us again, you 
have just a little time, you are really totally confident that 
your concerns of 1995 about these deficits are irrelevant to 
this situation of this year 2003 and 2004? They are irrelevant? 
You have no concern? You are jolly well sure everything is 
going to be fine?
    Mr. SNOW. Oh, you are not going to paint me into that 
corner.
    Chairman THOMAS. The Chair would indicate that the 
gentleman's question consumed the 5 minutes. The Chair allowed 
the witness to answer a question which was 4\1/2\ minutes. If 
the pattern continues, the Chair would request all Members to 
submit their questions in writing, and the Secretary may answer 
them in writing. Therefore, the Chair would appreciate the 
reasonableness of not abusing the timeframe in which the entire 
time is taken up with the question. The Chair then feels 
compelled to allow the witness to answer it. Let the Chair 
note, this is the second time in a row that it has occurred. 
Early on we seem to be in midseason form. Mr. Secretary.
    Mr. SNOW. Thank you. Let me be brief. The circumstances of 
then are different than the circumstances of now. Deficits 
matter. If the markets perceive deficits as being out of 
control, there will be market reactions. These deficits are not 
out of control. Interest rates is the barometer to look at to 
determine whether markets are beginning to get jittery. We have 
the lowest interest rates, Congressman, as you know, in 40 
years, and the level of interest rates simply isn't consistent 
with the observation that this deficit threatens our financial 
security.
    On the other hand, we must always be vigilant on deficits. 
It is critical that we be vigilant on deficits, and there are 
two ways to deal with deficits, in my view. One is a lot of 
growth. Get the stock market strong again. Get more people 
working. Get corporate profits up. Receipts will rise. Second, 
it is tight spending controls. That is the only way to do it.
    I will continue to be a serious deficit hawk. I don't 
retreat at all from my view that deficits matter, and that 
deficits that are too large relative to the scope of the 
economy and a corresponding debt level that is too high 
relative to the size of the economy if perceived as being a 
permanent part of the financial landscape are troubling, and 
will invite higher interest rates, which will slow growth.
    So, I remain committed to fiscal discipline, but I also 
think--and I mean this sincerely--that things like the dividend 
exclusion and the small business tax reductions and 
accelerating these tax cuts will give us growth that will help 
to put us on a path where the economy is much stronger.
    Chairman THOMAS. The gentleman from Michigan's time has 
expired. Does the gentleman from California wish to inquire?
    Mr. HERGER. Yes. Mr. Secretary, I want to join in thanking 
you for appearing before our Committee and congratulate you on 
your recent confirmation. I want to start by commending the 
Bush Administration on its proposals to make it easier for 
Americans to save for their retirement.
    As you know, many Americans today are concerned that they 
will not be able to save enough for their golden years. This is 
especially true for the more than half of all Americans who 
work for small businesses. Consider that while 85 percent of 
employees at firms with more than 100 employees have an 
employer or union-sponsored pension plan, only 31 percent of 
those working in firms with fewer than 100 employees have such 
a plan. As a result, only half of all working Americans have 
any pension plan at all. Small businessowners often cite the 
complexity of current rules and high compliance costs as 
reasons they do not offer pension plans.
    Mr. Secretary, by simplifying and streamlining pension plan 
rules, do you anticipate that it will be easier for smaller 
employers to offer these plans to their employees?
    Mr. SNOW. Congressman, absolutely. The whole purpose of 
these lifetime savings accounts, the so-called LSAs, and the 
retirement savings accounts, the RSAs, is to do precisely that. 
Only something like 25 percent of small businesses have any 
retirement plan, and the reasons you cite explain that: 
complexity, lack of flexibility, withdrawal terms, age limits, 
and on and on and on. What these new accounts do is to create a 
much more flexible and a much simpler way to save. I think that 
will clearly lead more small companies to put in place savings 
plans, and that will serve an important national objective of 
encouraging savings and promoting retirement security. I think 
this is a splendid development, a splendid proposal.
    Mr. HERGER. Thank you. Speaking of small business, let me 
also commend the Administration for its proposal to triple the 
small business expensing limit. Under the current law, small 
businesses can expense or fully deduct from taxable income up 
to $25,000 per year in new business investment. The 
Administration's proposal would increase this limitation to 
$75,000 per year, thus making it more affordable for businesses 
to make the kinds of business investments that we know are 
critical to our Nation's economic well-being. I have introduced 
legislation to implement the Administration's small business 
expensing proposal and look forward to working with you on this 
important issue.
    Last but not least, I notice that this year's budget 
includes a provision to make permanent the research and 
development tax credit that is scheduled to expire next year. 
This credit is very important to high-tech industry. In my home 
State of California, our State ranks first in high-tech 
employment and second in the high-tech average wage. While 
Californians represent about 13 percent of all the Nation's 
economy, it represents nearly 20 percent of all research and 
development spending. This spending creates high-paying jobs 
and has a positive ripple effect across California's economy. 
Given the recent economic downturn, it is more important than 
ever that we make the research and development credit 
permanent. I want to thank the Administration for including 
this item in this year's budget.
    Mr. SNOW. Thank you very much, Congressman. I think you 
have put your finger on one of the most powerful aspects, the 
most compelling on the President's proposal. The expensing, I 
would say, though, goes hand in hand, as you know, with the 
acceleration of the reduction in the tax rates because so many 
small businesses operate on a so-called now flow basis. They 
will be greatly advantaged by having lower marginal tax rates, 
which will cause their businesses to be in effect more 
profitable, which will lead them to want to undertake more 
investments and to use more of that expanded expensing. The two 
planks go hand in hand to create job growth and expansion in 
the small business sector.
    Mr. HERGER. Thank you very much.
    Chairman THOMAS. Thank the gentleman. Does the gentleman 
from Maryland wish to inquire?
    Mr. CARDIN. Thank you, Mr. Chairman. Mr. Chairman, as I 
pointed out, I welcome Mr. Snow here to our Committee. Mr. Snow 
for a time lived in Baltimore and was not only an outstanding 
business leader, but a person who really helped our community. 
Secretary Snow, welcome to the Committee.
    Mr. SNOW. Thank you.
    Mr. CARDIN. We understand that your new assignment will 
require certain changes as far as your involvement in our 
community, particularly with Johns Hopkins. We will miss that, 
but we very much welcome you in your new role as Secretary of 
the Treasury.
    Mr. SNOW. Thank you very much.
    Mr. CARDIN. I want to follow up on the point that was just 
made concerning small business and retirement savings, and I 
have a somewhat different concern. Mr. Portman and I, along 
with other Members of the Committee, Mr. Pomeroy and others, 
have been working in a bipartisan way to try to increase 
savings opportunities for Americans. With the help of Chairman 
Thomas, we have passed major legislation on a strong bipartisan 
vote on the Floor enhancing opportunity for people to put money 
away for their own retirement.
    We have done that for many reasons. Social Security has 
been mentioned previously, but as you know, private retirement 
savings is critical to the success long term of Social 
Security, and our savings ratios in this Nation need to be 
increased.
    At the same time, our priority has been to increase the 
number of employer-sponsored plans, because if the employer 
puts money on the table, it is more likely that younger workers 
and lower-wage workers are going to participate in retirement 
plans. We also don't want shelters, and this Committee has been 
pretty clear about trying to avoid types of opportunities that 
have very little social benefit that are tax-favored.
    So, with that in mind, I want you to respond to two parts 
of the President's proposal; the first, the President's 
lifetime savings accounts. I have a concern that will be a 
shelter; that it will just allow individuals to take moneys 
that are already in savings and transfer them into the LSAs 
where there is no penalty for withdrawal, can be withdrawn for 
any purpose whatsoever. Why wouldn't that just be a vehicle? 
Wouldn't that be the first advice given by any accountant or 
tax planner, to take the moneys that you have in taxable 
savings and just transfer them over to the LSA in order to 
avoid current taxes?
    Mr. SNOW. Well, there is an annual contribution limit, of 
course.
    Mr. CARDIN. $7,500.
    Mr. SNOW. $7,000. It is a vehicle--there are always 
tradeoffs in these things. This is a vehicle to encourage 
savings for smaller businesspeople and people who don't--
wealthy people have lots of ways to save.
    Mr. CARDIN. I agree with you.
    Mr. SNOW. This is a way to encourage savings on the part of 
people who have a difficult time working their way through the 
complexity of the individual retirement accounts (IRA) and the 
Roths and the 401(k)s and so on and so forth. Now, maybe it can 
be made better, maybe it can be improved, and certainly we 
would be interested hearing from you on that and working with 
you. The whole idea is to stimulate savings in the sector of 
the economy where savings rates are inadequate.
    Mr. CARDIN. We share that concern, and that is why we would 
urge you to take a look at some of the proposals that have been 
placed on the table for low-income wage earners to offer 
incentives for them to save, and to encourage small businesses 
to provide employer-sponsored plans so money is on the table 
for lower-wage workers.
    Your RSA account also troubles me. It seems to me that if I 
am a small businessperson and I have a retirement plan for my 
employees, and you are now offering me an opportunity to put 
$7,500 a year in the RSA account, why wouldn't I just put the 
money in the RSA account and not go through any of the 
aggravations of establishing a retirement plan for the rest of 
my workers?
    Again, our goal is to get more money into retirement 
savings, and it seems to me, with the flexibility that is being 
offered under the President's proposal, we are liable to end up 
with less money in retirement savings.
    Mr. SNOW. Well, you raise good questions, and some of the 
questions I have begun to raise myself. When you talk to people 
who market, who are in the business of selling savings accounts 
of one kind or another, they come back and say these are hard 
to sell because of the complexity----
    Mr. CARDIN. So, we should fix those.
    Mr. SNOW. Making available simpler, more flexible savings 
vehicles of some kind will stimulate savings. That is the 
objective. Congressman, I would be delighted to hear your 
suggestions on how to do it better.
    Mr. CARDIN. Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank the gentleman. Does the gentleman 
from Louisiana wish to inquire?
    Mr. McCRERY. Yes. Thank you, Mr. Chairman. Mr. Secretary, 
the Ranking Member of the Committee on Ways and Means today 
made a statement--and I think I am quoting him accurately when 
he--he said that ``most economists think these deficits will be 
devastating.'' Although my good friend from New York is not 
usually guilty of hyperbole, he may have slipped up this once. 
I think it is important for us not to let that statement stand. 
It is important because I think the American public wants to 
know the answer to that question; and certainly those of us in 
the legislative branch who are elected by the American public 
would feel more comfortable voting for the President's plan if 
we thought the American public agreed with your assessment that 
these deficits as outlined in the President's plans are not 
devastating and, in fact, may be desirable in the short term.
    In fact, I am fairly sure in saying that the majority of 
the economists would not agree with Mr. Rangel's statement, and 
I will quote a couple of them to illustrate why I think that.
    A John Cedar, a professor at North Carolina State 
University, published a comprehensive survey of the literature 
on this subject in 1993 and found that, ``the effects of 
government debt and deficits on the economy are not obvious 
from either economic theory or statistical evidence.'' More 
recently, Kevin Klieson, an economist at the Federal Reserve 
Bank of St. Louis, states: ``Empirically, the linkage between 
budget deficits or surpluses and interest rates is weak.''
    So, in fact, the literature does not support the conclusion 
that the Ranking Member has drawn, and, in fact, there is 
probably some disagreement among economists as to the effect of 
deficits the size of which are portrayed in the President's 
budget. I think that probably is the most important subject we 
should discuss with respect to the question of deficits. The 
deficits referred to in the early eighties, for example, ran 
about 6 percent of our GDP. Now, I would probably agree that 
those deficits, if allowed to string out over a number of 
years, could become dangerous. The deficits outlined in the 
President's budget at their highest are 2.8 percent and then 
quickly going down to 1.8 percent, 1.6 percent and so on. 
Clearly, the deficits anticipated by the President's budget are 
nowhere near the deficits we experienced in the eighties, in 
the early eighties. So, I think it is important for the public 
to understand that.
    Also, you have alluded to the fact--or your belief anyway--
that these deficits will be short-term and, in fact, are 
necessary or at least desirable in order to improve the 
economy, to get the economic growth at a higher rate. Is that 
correct? Is that your assessment?
    Mr. SNOW. It absolutely is, Congressman. I agree with your 
assessment of deficits. Deficits become troublesome when they 
are large relative to the earning power of the economy and seen 
as going on and on. That is when financial markets get upset.
    Mr. McCRERY. Structural deficits.
    Mr. SNOW. Structural deficits.
    Mr. McCRERY. Are we in a structural deficit now?
    Mr. SNOW. No, we are not in a structural deficit. The 
deficit, as I have said, is modest relative to historical 
circumstances and modest relative to the circumstances we find 
ourselves in. Most importantly, it is going to be declining 
both in absolute terms and in relative terms. It is a 
manageable deficit. Do I wish we could accomplish all that we 
need to accomplish, the war on terrorism, the stimulating and 
growing the economy, preparing for longer term growth with well 
thought out tax advantages? Yes, I do. This is an investment in 
our future. It is a prudent investment in our future.
    Mr. McCRERY. In fact, Mr. Secretary, if you look at the 
history books, you will see that every time the United States 
has been at war, we have run deficits. Every time the United 
States has had a recession, we have run deficits. This is no 
different.
    I would like you to comment quickly, if you could, on a 
statement made by another Member of the Minority on the 
Committee who said that the dividend exclusion would have 
little effect on the cost of capital or the stock market. Do 
you agree with that?
    Mr. SNOW. No. I would disagree with that very strongly. I 
think the dividend exclusion will be a very powerful--have a 
very powerful effect on equity investments, on equity 
valuations longer term, and on growing the economy. It will 
lead to a stronger and better economy. It is a centerpiece of 
this proposal.
    Mr. McCRERY. Thank you.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from Washington wish to inquire?
    Mr. McDERMOTT. Sure. Mr. Secretary, you have had a very 
calming influence on this Committee; they are very quiet. Now 
that Mr. McCrery has ruled out any more hyperbole, I just want 
to give one quote from your past.
    Within 10 years from 1995, the Federal budget's two fastest 
growing components, interest on the debt and entitlement such 
as Social Security, Medicare, Medicaid, and Federal pensions, 
will consume all the Federal revenue. There will be no money 
left for any other Federal programs, not even national defense. 
Now, you wouldn't stand by that, would you?
    Mr. SNOW. The underlying forces that were at work then----
    Mr. McDERMOTT. You mean when Democrats were raising taxes--
--
    Mr. SNOW. Are fortunately----
    Mr. McDERMOTT. Paying this on the debt?
    Mr. SNOW. Are fortunately, still at work longer term. My 
crystal ball was off by some time. Those demographics that are 
driving those numbers are--and that, as you know better than I, 
health care costs, those forces are still at work.
    Mr. McDERMOTT. Well, I have a very hard time sitting here 
listening to what was said by the last speaker, and you agreed 
with it. Mr. McCrery said when we have wars, we run deficits; 
when we have depressions and recessions, we have deficits. I 
don't remember that we cut taxes every time that we had a 
recession or a war. That is what is different about this. What 
really troubles me--and I was riding out on a plane from 
Seattle, and a guy said to me, I do not fly U.S. carriers 
anyplace but in the United States. I won't go overseas on one 
of them because I am afraid.
    What I am trying to figure out is how does the President 
stimulate people to invest when people are scared about a war? 
If you can explain to me how cutting the dividend tax will 
somehow in this climate stimulate--I saw this ad in the Wall 
Street Journal where they had this--all these business people 
saying, we don't want to go to war. The war must be a stimulus 
for something, and I--why is the President taking us to war and 
giving away the money at the same time? How is that going to 
work? Explain that to me, because I am not an economist.
    Mr. SNOW. The juxtaposition there, of course, is we face an 
external threat, and we need to address the external threat. We 
also face an internal threat, the need to keep the economy 
strong and on a good growth path. We are responding to both 
simultaneously, and that is appropriate.
    Mr. McDERMOTT. How can starting a war that is going to 
spend $100 to $200 billion over the next 10 years--and that is 
what Mr. Lindsey said before they fired him, so I assume he was 
telling us the truth right up there until the end. The fact is 
that if you are going to take that out of the economy, how are 
you going to have a stimulus of anything in a peacetime 
economy?
    Mr. SNOW. Congressman, the President is trying to avoid a 
war, not get into a war. He is trying to----
    Mr. McDERMOTT. Did you advise him not to go to war?
    Mr. SNOW. I am not at that end of the government. The 
President has plenty of good advisors on national security and 
on those issues.
    What I would advise the President is that he has got a good 
growth package, and that this is the time to have a growth 
package. This is the time to make sure the economy stays 
strong. It is a growth package that is based on sound 
economics. If there are any economists who say that the 
dividend--that paying twice on corporate income, both at the 
corporate level and the individual level, is good economics, I 
haven't met them. I sure have met a lot who think it isn't good 
economics. I sure have met a lot who think it will stimulate 
the economy to lower the cost of equity capital. I have met an 
awful lot who think that we are encouraging debt-to-equity 
ratios that are too high. I have met many Congressmen who feel, 
as I do, that the current system discourages corporations from 
paying out their earnings in the form of dividends, because, 
after all, the effective rate on dividends is something like 70 
percent. I don't----
    Mr. McDERMOTT. So, what you are saying is that having given 
this dividend break to the people on the top of the economic 
ladder, that will suddenly make it all better for the people in 
my district where the long-term unemployment has risen by 26 
percent in the last 6 months. How is that going to work for the 
people on the bottom?
    Mr. SNOW. Congressman, let me respond. There are a lot of 
people who will benefit from that dividend provision. Half of 
the American families are stockholders now. My mother was a 
schoolteacher. She taught in the Ohio public school system and 
retired on a pension from the Ohio school system. She also 
inherited from my father a few stocks, and she owned a few 
stocks; not a lot, never wealthy at all. She and her fellow 
schoolteachers would get together and have a cup of coffee or 
something once in a while and talk about their circumstances. 
Often their conversation turned to how low the Ohio State 
pension payments were to them, but how needful they were of it. 
Often the conversation turned to other sources of income, one 
of which was dividends.
    To my mother, who lived on--I think her pension was $8,000 
a year from the Ohio State teachers' plan, getting $200 or $300 
extra from her dividends would have meant an awful lot. I 
submit there are a lot of people like that, elderly people for 
whom a few hundred dollars extra a month from a dividend would 
mean a lot.
    Chairman THOMAS. If anyone is concerned about non-monetary 
incentives, I think there are a lot of folks in Ohio nowadays 
talking about ``how about them Buckeyes.'' Does the gentleman 
from Wisconsin wish to inquire?
    Mr. KLEZCKA. Mr. Chairman, thank you for the time. Mr. 
Secretary, there has been a lot of talk about deficits this 
afternoon, and I think I have sat here long enough. I have got 
it figured out. When deficits are increased during a Democratic 
Administration like in 1995, that is bad. When deficits are 
increased during a Republican Administration, that is okay; 
that is better. Mr. McCrery even told us that it is not only 
okay, but it is desirable. So, I just think I have it figured 
out. I want to share with my colleagues so maybe we can get off 
the deficit thing and know for a while that we are going to be 
in a period of deficits whether we like it or not.
    Years ago we were told that the effect of deficit was to 
raise the capital costs for other players in the market because 
the government is there taking it first. I guess those rules 
have changed also.
    Mr. Secretary, my question to you is can you share with the 
Committee what the stimulus effect or the growth effect has 
been since the 2001, $1.2 trillion tax cut?
    Mr. SNOW. Yes. I think you and your colleagues in the 
Congress and the Administration should take great satisfaction 
out of the fact that we avoided a much deeper, a much harsher 
and much longer recession.
    Mr. KLEZCKA. Okay. So, it hasn't had any effect on 
unemployment. We have seen that balloon over the last year. 
Okay. Can you----
    Mr. SNOW. I am sorry. You need to compare things with what 
they would otherwise have been, and without the effects of the 
Economic Growth and Tax Relief Reconciliation Act of 2001. I 
will submit to you that the economy would be in much worse 
shape today than it is.
    Mr. KLEZCKA. Okay. Do you admit that it is not in very good 
shape today?
    Mr. SNOW. I think it is recovering. The recovery isn't as 
certain or strong as I would like to see.
    Mr. KLEZCKA. Well, it hasn't recovered in Milwaukee, 
Wisconsin. In fact, as I looked at the monitor earlier in the 
day, the stock market, the Dow, was down another 130. So, I 
can't concur with you the economy is resilient. I think we are 
still in some very deep and serious problems. Can you indicate 
to this Committee and to the American public that although the 
$1.2 trillion tax cut didn't bring us out of the recession 
totally, that if we throw another $674 billion at her, she is 
going to do it this time for sure?
    Mr. SNOW. I would be confident that the course that the 
economy is on with the benefits of this package would, to a 
very high degree of probability, give us considerably more 
growth and considerably more jobs. I think the estimates are 
450 to 500,000 additional jobs by the end of this year, and 
something like a million and a half, a million four, by the end 
of the fourth quarter next year. That would make a real dent in 
unemployment.
    Mr. KLEZCKA. Again, that is a speculation. That is a 
guesstimate.
    Let me ask one final question, Mr. Secretary. In the event 
that the President would go forward and attack the sovereign 
nation of Iraq, incurring what some experts indicate could be 
as much as an $8 billion cost per month--and that is on the low 
end, at that point would you recommend to the Congress that 
because of that incident, because of that occurrence, and 
because of the attendant costs of the war, that we should put 
aside for at least a small time or short time the tax cut?
    Mr. SNOW. Congressman, I am still hopeful that war will 
be----
    Mr. KLEZCKA. No, no. Let us get past that, okay? You and I 
aren't in that decision process. Let us say it would occur, and 
if you ask me, it will occur, because I think the President is 
possessed with this. That is not the debate before this 
Committee. Let us say it would occur, and we are incurring 
costs to the tune of a minimum of $8 billion a month for the 
war. Would you at that point come to the Congress and advise 
that we set aside, for at least the time being, the tax cut 
that is on the table now?
    Mr. SNOW. Congressman, I think that is awfully speculative. 
What I do know is the tax cut that is on the table in the 
circumstances we are in now makes good sense. I can----
    Mr. KLEZCKA. If the circumstances change, and a higher 
priority then is the expenditure to keep our troops safe and to 
keep them armed. At that point would you say set the tax cut 
aside so he can fund the war totally?
    Mr. SNOW. Congressman, I will say what I said earlier: That 
governmental policy should be addressed to priorities of the 
country.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from Michigan wish to inquire?
    Mr. CAMP. Thank you, Mr. Chairman. Mr. Secretary, thank you 
for being here. I want to commend the President on his budget 
for the permanent extension of the research and development tax 
credit. I think that is a positive thing that will help 
investment, help product innovation, and ultimately create 
jobs. There is legislation that has been introduced by my 
colleague Mrs. Johnson, which I have cosponsored as well as 
Congressman Matsui and Cardin, that will help allow more 
companies to utilize that credit. I look forward to working 
with you on that.
    We have had a particular problem with cyclical companies, 
those in the manufacturing sector, that, after September 11 and 
the economic slowdown that followed, have not been profitable. 
I think one way--and also, these companies are facing 
alternative minimum tax (AMT) and pension liabilities. I think 
one way to provide needed cash flow to these employers would be 
the extension of the net operating loss carried back from 2 to 
5 years for losses incurred in 2003 and 2004. Do you think 
there is any likelihood that that provision might occur?
    Mr. SNOW. I will have to check with the people who know a 
lot more about the technical side of those things than I do at 
this point and get back to you, but I will be pleased to do 
that.
    [The information follows:]

    Response: Under current tax law (as well as law in effect prior to 
2002), the net operating loss (NOL) of a taxpayer generally can be 
carried back 2 years and carried forward 20 years to offset taxable 
income in such years. The carryback and carryover rule were established 
to allow taxpayers to level out fluctuations in taxable income. In 
2002, temporary economic stimulus provisions applying to NOLs 
originating in 2001 and 2002 generally allowed a longer 5 year 
carryback period to increase cash flow through the refund of income 
taxes paid in prior years. The President's Jobs and Growth Plan did not 
include an extension of those rules principally because of the 
potential interaction with the proposal to eliminate the double tax on 
corporate profits. Now that Congress has enacted the jobs and growth 
package, we would be pleased to work with Congress on legislation to 
provide a longer carryback period for losses occurring in 2003 and 
2004.

                                 

    Mr. CAMP. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentleman from Georgia wish to 
inquire, Mr. Lewis?
    Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. 
Mr. Secretary, thank you very much for being here. I just have 
a few random thoughts and ideas, you can respond or maybe try 
to give me an answer to.
    How do you justify such a massive tax cut? How much longer 
are we going to blame many of our economic problems on 
September 11? Mr. Secretary, we can only wrap ourselves in the 
flag so long. In this budget we see a dramatic increase in 
defense spending; at the same time, we see reduction in 
resources for domestic program across the government. I want to 
know whether you and the President are prepared to take care of 
the basic human needs of the American people, the people here 
at home. Mr. Secretary, with this budget, what is your vision? 
What is the vision of the President for the American people, 
for world community as we look ahead for the next 5, 10, or 20 
years? You may respond, sir.
    Mr. SNOW. Thank you. It is really an astonishing thing, 
Congressman, to realize what the American economy has been 
through, what our Nation has been through in a relatively brief 
period of time. I remember in my old life in the summer of 
2000, a transportation company that operates through your city, 
as you know, but also operates all across this country and all 
across the world. Something happened in the summer of 2000 that 
led to a dramatic reduction in carloads, in truckloads, in 
containerloads not only at CSX, but at virtually every other 
major transportation company. That was reflecting something 
going on in the economy.
    The wonderful period of the 1990s had come to an end. We 
saw it first--some of you mentioned your background in 
manufacturing. We saw it first in manufacturing, and as a 
transportation company we served manufacturing first and 
foremost. We also served the consumer sector of the economy, 
and the consumer sector began to decline slowly, and retail. 
Then, of course, we knew that by early in 2001 there was a 
recession under way. We in the industrial sector saw it first, 
but it hit the whole economy in 2001. Then we had September 11. 
Then we had this series of scandals in corporate America that 
shook our confidence in our capital markets, a real blow to the 
capital markets. On top of all that and occurring 
simultaneously was the biggest meltdown in the history of the 
U.S. equity markets, with some $7 trillion coming out of the 
system.
    The wealth effects were massive, and they were widespread, 
because 50 percent of the families in America own equities. To 
think that we could weather those shocks and still have an 
economy performing as well as this one is today with low 
inflation rates and low interest rates, with a buoyant consumer 
market and a buoyant housing market, and with productivity in 
the last quarter an all-time high, it is really an astonishing 
commentary on the resiliency of this economy. Resiliency, that 
grows out of things that were done in the seventies and with 
deregulation and downsizing, and in the eighties with 
rightsizing and reengineering corporate structures and the 
application of technology to modern business, all of which--and 
the growth of global trade, all of which made this economy much 
more resilient than it otherwise would have been. You have all 
heard Chairman Greenspan talk much more eloquently than I can 
on those themes.
    So, what do we want? We want an America that provides 
people with good jobs and good futures, real jobs, permanent 
jobs, and a sense of security. As Secretary of the Treasury, I 
have a real responsibility, Congressman, to play a leadership 
role in getting the American economy righted, to getting it 
going in the right direction, to giving people the opportunity 
to get the work they want, but with real jobs and rising 
standards of living, rising real wage rates. That is the sort 
of world that I believe in, and it is the sort of world the 
President believes in.
    Mr. LEWIS OF GEORGIA. Thank you.
    Chairman THOMAS. Thank the gentleman. Does the gentleman 
from Louisiana, Mr. Jefferson, wish to inquire?
    Mr. JEFFERSON. Yes. Thank you, Mr. Chairman. I want to ask 
the Secretary this question. I have heard the idea of a 
stimulus package described as having two essential features, 
perhaps only two: The first being that it would be temporary, 
and the second is that it would have the effect of stimulating 
consumption either on the part of individuals or companies. Do 
you deal in a different definition of a stimulus package than 
that, or do you agree that that is the proper way to define it?
    Mr. SNOW. Actually, I am not sure that I got--if I don't 
respond, it is because I may have missed a word or two there. I 
think your question went to the relationship between the 
permanency.
    Mr. JEFFERSON. It went to the definition of what a stimulus 
package really is, the essentials of it. The essentials that 
have been talked about most in this Committee from every expert 
I have heard come before us is that the stimulus package is 
always temporary, and it always stimulates consumption either 
by individuals or by corporations.
    Mr. Chairman, I have had to say that twice. I hope it 
doesn't take away from my time.
    Mr. SNOW. Okay. I don't look at this as a traditional 
stimulus package. I look at this as a set of good economics 
which will have short-term and long-term effects. In the short 
term, there will be this spurt to growth that will assure that 
we stay on the recovery path and create the 500,000 jobs by the 
end of the fourth quarter of this year, and the million plus by 
the end of the fourth quarter next year, raising GDP by a 
percentage point or so, 1.1 I think in the numbers. Also, 
also--and this is I think the critical thing about this plan--
creating, putting us on a stronger path for long-term growth 
that so forever, not just next year or the year after, but 
forever we are going to have the American economy performing 
better. So it is--I don't look at it as in terms of it being a 
short-term stimulus package.
    Mr. JEFFERSON. The reason you usually look at it as a 
short-term package, because it imposes such huge shock into the 
economy, usually a huge shock into the budget deficit and to 
the deficits of the country. Usually sometimes we tolerate 
reductions in expenditures that the government can make and 
reductions in government income to offset against the effect of 
spur and consumption, and--but no one wants to tolerate long-
term budget imbalances as a result of a stimulus, and that is 
why the talk is always temporary.
    You seem to be saying that it is not a stimulus package in 
the traditional sense, it is some kind of a hybrid of a short-
term/long-term package here. Now, that puts a huge bet on the 
rightness of this package, because if it is wrong, then we end 
up with living with deficits for the longest period of time. 
You need to understand, one thing that seems to me has been 
left out of here, we talk about the history that took place 
that brought these huge surpluses. You said was the economy 
that was rolling along and all that. Also, you might recall 
there were huge sacrifices made by many Members on this side of 
the aisle that dealt with increasing taxes, that set our budget 
right in 1993 that resulted in a whole lot of folks losing 
elections in 1994. That was a myriad of things that happened, 
not just--and many of these things, when we stop competing with 
the private sector and start being able to get interest rates 
down and that sort of business, that helped to spur the 
economic growth. It wasn't just the fact that somehow it just 
took off; it was that we did some things here that actually set 
a fiscal stage for that to happen. It didn't involve tax cuts, 
it involved tax increases on high-income folks, some direct 
targeted benefits to small businesses, and a number of other 
features that made the fiscal thing work here that really 
accounted for the positioning for the growth.
    Now, the last thing I should say before my time does run 
out, I don't think there is any real room for what I might call 
informed disagreement on the issues that were raised by 
Stephanie Tubbs Jones a minute ago and by some others here 
about the effect that this corporate dividend deduction 
business shareholders will have on the tax advantage 
investments in low-income housing and new market tax credits 
and others. I don't think there is any basis to think that 
these effects won't follow. There is no need to have a follow-
up question or a memo sent because it is pretty obvious, unless 
the shareholder doesn't get the tax-free dividends, unless the 
corporation pays the taxes. Ordinarily now we are depending on 
corporations to pay to take advantage of these credits in order 
to reduce that taxable income, and these things work against 
each other.
    So, there has to be--my question is, since I know that is 
the effect of it, has the Administration thought about how it 
might minimize that or mitigate against it by having some sort 
of an opportunity for individuals perhaps to take advantage of 
the low-income housing rather than corporations to incentivize 
moving in that direction--so that you cannot have such a huge 
set of problems created by this business in the new market size 
credit and low-income housing area?
    Mr. SNOW. Congressman, I will look forward to getting back 
to you on that. I responded earlier by saying that what I have 
looked at suggests the impact is not great, municipal bonds and 
other forms of investments, primarily because while there could 
theoretically be a relationship because they are substitutes in 
some ways, equities and debt, other forms of debt investments, 
the debt investments have a structure of their own that fits a 
particular investor profile, low risk, sort of fixed return, 
and they appear to be basically debt in equities. The sort of 
debt you are talking about, municipal bonds and so on, State 
bonds, are separate markets without close substitutability.
    That is a subject that you raised a good question, and I 
will agree to look into it in more detail.
    [The information follows:]

    Response: As finally enacted by Congress, the provision reducing 
the double tax on corporate profits will have absolutely no effect on 
the low-income housing tax credit.

                                 

    Chairman THOMAS. I thank the gentleman for his comments. 
Does the gentleman from California, Mr. Becerra, wish to 
inquire?
    Mr. BECERRA. Thank you, Mr. Chairman. First, Mr. Secretary, 
welcome, and congratulations on being named the new Secretary. 
We wish you well and look forward to working with you.
    Mr. SNOW. Thank you very much.
    Mr. BECERRA. Obviously there will be a lot of issues that 
will bring you to our Committee often, and we are looking 
forward to have the chance to dialog with you.
    I want to move back to what the President said in his State 
of the Union Address where he mentioned that he will not pass 
along our problems to other generations. That made me reflect 
back to what he had said just 2 years before in 2001, shortly 
after his State of the Union in his first year in office, where 
he said that every dollar of Social Security and Medicare tax 
revenue will be reserved for Social Security and Medicare. He 
said this, if you recall, to allay fears that many of us had 
that his 10-year, $1.7 trillion tax cut that would benefit 
mostly wealthy Americans would take us back down the road of 
deficits and raids on the Social Security and Medicare Trust 
Funds.
    Today, the President's budget that we are discussing today 
would consume all of the Social Security and Medicare Trust 
Fund surpluses for at least 5 years, and likely longer, and 
that totals more than $1 trillion that would be raided from the 
Social Security and Medicare Trust Funds.
    On top of that, rather than reduce or eliminate the debt, 
the national debt, as the President had first said he could 
back in 2001, his budget increases the national debt 
dramatically by well over $1 trillion over the next 5 to 10 
years, depending on what happens with the economy.
    Now, about a year ago, the last numbers we have special 
data for, we paid as a Nation about $171 billion in interest 
payments on the national debt. So, $171 billion in taxpayer 
money went for nothing more than to pay interest, gave us 
nothing, nothing more for our schools, nothing more for health 
care, did nothing for our roads, just to pay off the interest 
the way people have to pay interest on their mortgage or on a 
student loan. According to the Office of Management and Budget 
Director, Mr. Mitch Daniels, apparently we are looking at the 
possibility of having budget deficits increase to about $300 
billion a year.
    If when we had a national debt that causes us to pay $171 
billion in interest, which amounts to about $1,300 per every 
American family in this country, if you look at a $300 billion 
deficit, which Mr. Daniels says we can expect, that is probably 
some $2,300 out of the pocket of each and every American family 
that, for most, would be difficult to shoulder, let alone try 
to find moneys to save under the President's new tax savings 
plans.
    My question is the President's proposal to cut taxes which 
he has before us which would cost us another $900 billion or 
so, which principally deals with dividend--elimination of the 
dividend tax, which benefits again mostly wealthy folks because 
they are the ones that own most of the stock. How is that going 
to help the average American? I know the President--and Mr. 
Secretary, I think you mentioned as well--that the average tax 
cut under this plan will be about $1,000 or $1,100, but I know 
that that factors in the very biggest tax cut with the very 
littlest tax cut, and the average comes out to $1,000. For the 
typical taxpayer, the person right in the center, the middle-
income person, that 20 percent of Americans who are smack in 
the middle, my understanding of the Tax Code would be a little 
bit more than $200 for the entire year, because they are a 
little bit more typical than the average family of four with 
two kids. You know, whether we like it or not, the average 
family doesn't look like that anymore, and the typical middle-
class family would receive about a $200 to $250 tax cut, 
whereas the millionaire would probably get, under this plan, 
about $90,000 in a tax cut.
    In an age where we are seeing our deficits grow, where the 
national debt has increased, where we are paying over $170 
billion a year in interest payments to do nothing to help 
education and health care, can you tell me where we are going 
to get the money to try to decrease the debt and still provide 
these tax cuts that benefit mostly wealthy Americans?
    Mr. SNOW. Sure. You have asked me a lot of questions. I 
don't know that I can respond to all of them.
    Chairman THOMAS. I will tell the gentleman he has 30 
seconds in which to respond. I am very mindful of the clock in 
trying to move the Committee along.
    Mr. SNOW. Well, first on Social Security, which is where 
you started, the--ultimately, the government's ability to pay 
for Social Security depends upon the capital stock of the 
country and on the output of the economy, not the size of the 
trust funds. You know, it is a pay-as-you-go system. The 
numbers I cited were a family of four, $40,000 and $1,000. The 
numbers you cited were for some different distribution that I 
can't recall right now, but I will just answer the question.
    Mr. BECERRA. The one-fifth percent.
    Chairman THOMAS. The gentleman's time has expired. We do 
have a transcript, and can supply the questions. We appreciate 
the Secretary answering the gentleman's questions. Does the 
gentleman from Ohio wish to inquire?
    Mr. PORTMAN. Thank you, Mr. Chairman. Mr. Secretary, you 
have done quite well on your maiden voyage, as you called it. 
You have navigated the questions well, and you have given this 
Committee a lot of good input for us to be able to legislate 
responsibly, which is the purpose of these hearings.
    Just quickly in response to my friend from California on 
the interest on the debt, of course none of us want to see us 
go back into deficits. When I got elected, we were paying about 
20 percent of our annual budget on interest on the debt. It is 
going to be about 8 percent next year based on projections, 
because we were taking advantage of lower interest rates, 
interest rates being the lowest they have been in 40 years. We 
have to remember that about our economy, and that goes to the 
issue of our deficit and its impact on the economy, obviously, 
because our interest payments are lower because rates are 
lower.
    As a percentage of GDP, I heard earlier people saying that 
this is going to be the worst ever and compare it to past 
years. As I look at it, looking at the data over the last 20 
years, it will be a smaller percentage of GDP next year, even 
with all of our problems, than it has been in 12 of the last 20 
years. In fact, back in the early eighties when the other party 
controlled this place, it was about twice of the percentage of 
GDP that it will be next year even with quadruple whammy that 
the Secretary talked about, war, recession, and emergency, and 
of course the impact of corporate accountability. September 11 
alone--someone said earlier--$100 billion in direct costs to 
American taxpayers. The intangible impact no one can calculate 
to our economy and to the global economy.
    Just quickly, Mr. Secretary, you talked about the 
importance of us getting back to fiscal discipline. I couldn't 
agree more. The way we did it in the nineties was we restrained 
spending, we kept it under control. I know people are 
anguished. They have talked earlier today about we aren't 
spending enough in this budget. Well, how much is enough? We 
are going to spend over 4 percent in this budget. I think the 
President is smart to keep it at that level. We should perhaps 
be doing even more in terms of keeping our spending under 
control, but that is, of course, about half of what we have 
been doing in Congress over the last several years.
    So, the key is restraining spending. That is what happened 
in the nineties. That is how we got the balanced budget. That 
is how we got our growth back. The second part, of course, is 
using that to grow the economy. If you could just briefly 
again, Mr. Secretary, tell us how the tax package as a whole, 
including the dividend tax cut, stopping the double taxation of 
dividends, will help grow this economy.
    Mr. SNOW. This tax package will help grow the economy 
because it will create more disposable income in the hands of 
consumers and not--and will reflect today a greater sense of 
confidence in the economy that they will have as they know that 
money will be coming in the years ahead. So, they will 
telescope into the present the ability to use tax cuts in the 
future that would have only been available in the future. That 
will lead to more spending. As spending goes up, it will lead 
to growth in businesses; it will lead to more investing. As 
small business will take advantage of the expensing provision, 
lower costs of equity capital will encourage people to issue 
more equity capital, and we will get better patterns of 
spending and investing in savings, will make the economy more 
efficient. As you make the economy more efficient, it grows, 
and that is good for everybody.
    Mr. PORTMAN. Mr. Secretary, even those who would agree with 
you on that might still say, as Mr. Rangel did at the outset, 
gee, this is not fair, because you are shifting the burden to 
those who are working people as opposed to those who are 
investing people. He said that this burden would shift. Payroll 
taxes would be used for the tax cuts.
    As I add it up, about 34 percent of our revenue this year 
will come from payroll taxes, from Social Security and 
Medicare. Social Security alone will be about 22 percent of our 
budget, another 23 percent in health care, including Medicare 
and Medicaid. That is about 45 percent.
    Would you say that payroll taxes are not being used for 
their intended purpose?
    Mr. SNOW. Payroll taxes are essentially premiums on 
Medicare and Social Security.
    Mr. PORTMAN. I would just say finally, Mr. Secretary--I 
don't have a whole lot of time here, unfortunately--but if you 
look at your overall package, including ending the double 
taxation of dividends, the average tax reduction ranges from 
about 17 percent for taxpayers with under $30,000 in income to 
just over 11 percent with taxpayers who are in the over 
$100,000 range. Because the percentage reduction is greatest 
for families with incomes under $50,000, those families will 
pay a smaller share of the total income tax burden at the end 
of the President's proposal, and that is something we need to 
keep in mind.
    Conversely, those families with over $100,000 in income 
will receive a smaller than average percentage reduction, of 
course, and they are going to pay a larger share. Already, the 
top 1 percent pays about 37 percent of our income taxes, and 
maybe that is not enough. They are going to be paying a higher 
percentage after this is all done. The top 10 percent now pays 
67 percent of our income taxes. Maybe that is not enough, but 
they are going to be paying a higher percentage.
    So, just to get back to Mr. Rangel's point, I think we need 
to look at the facts.
    Finally, Mr. Secretary, on your retirement savings 
proposals, I do hope you will look at what we have done. In the 
last 5 years, this Committee has been very aggressive in 
increasing the amount people can contribute to their 
retirement, simplifying the rules and allowing for portability. 
We would like to continue doing that.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Texas, Mr. Doggett, wish to inquire?
    Mr. DOGGETT. Thank you, Mr. Chairman. Mr. Secretary, I want 
to applaud your role as Co-Chair of the Conference Board 
Commission on Public Trust and Private Enterprise and 
specifically the recommendation that you made last month that 
auditors should not be in an advocacy position on items such as 
novel and debatable tax strategies and products that involve 
income tax shelters and extensive offshore partnerships or 
affiliates.
    As you may know, I have been seeking for the last 4 years 
to get changes in the law to shut down abusive corporate tax 
shelters. Last year, Chairman Thomas adopted some of this 
language in some legislation he introduced to incorporate and 
codify the judicially known doctrine of economic substance. 
Tomorrow, Chairman Grassley and Ranking Member Bachus are 
marking up economic substance legislation that, as best I can 
tell, tracks pretty much near verbatim what I have been 
advocating.
    My question to you is whether we can count on your 
leadership in cracking down on abusive corporate tax shelters 
and specifically in supporting the approach that the Senate 
Committee on Finance appears ready to undertake to codify the 
economic substance doctrine.
    Mr. SNOW. Congressman, I support the economic substance 
doctrine. I think it makes good sense as a judicial concept. 
Whether it should be codified or not, I have not at this early 
stage of my tenure been able to give a lot of thought to. I 
would have some reservations, because when things get codified 
you lose some of the flexibility that courts or administrative 
agencies might have in applying these principles.
    On the question of whether I will be vigorous and attentive 
to the issue of abusive tax shelters, absolutely, I will.
    Mr. DOGGETT. Then let me ask you about something that you 
had reservations about. In fact, only about 11 months ago you 
indicated that you hoped the Republican stimulus package would 
not be approved by the Congress. Was there any public 
expression of your support for any stimulus package prior to 
your announcement that you would be serving as Treasury 
Secretary? I am talking about the interview you had down in 
Boca Raton with Bloomberg last February 28.
    Mr. SNOW. I don't actually recall that, but I certainly 
have shown disinclination to support various stimulus packages 
in the past. I didn't support the stimulus package that was 
proposed shortly--or discussed, anyway--shortly after President 
Clinton took office.
    Mr. DOGGETT. I certainly agree with you about your comments 
last year in Boca. So, this is the first stimulus package you 
have endorsed, the one you are here on today?
    Mr. SNOW. Congressman, you have to refresh my recollection, 
because I don't really recall that interview.
    Mr. DOGGETT. Well, the deficit that will result from the 
plan that you are embracing today is truly historic. In 
absolute dollar terms, this is about the largest annual deficit 
that we have ever had in the history of the United States, 
isn't it?
    Mr. SNOW. As Congressman Portman pointed out, it is small 
relative to the size of the economy compared with a number of 
prior deficits. We have to keep in mind that this is a huge 
economy.
    Mr. DOGGETT. In terms of absolute dollars, though, it is 
historic, and in terms of relative percentages, it is much 
higher than when you were concerned opposing deficits back in 
1995.
    Mr. SNOW. I started that process, though, Congressman, 
back--somebody said that I never was concerned about deficits 
when Republicans were in office. I remember working with 
President George Herbert Walker Bush on a balanced budget 
amendment. We were concerned about budgets back when he was 
President.
    Mr. DOGGETT. Seeing our deadline approaching, you know that 
Mitch Daniels has said that these deficits and the debt 
associated with them are going to continue for the next 10 
years; and my question to you is, isn't it obvious that with 
the baby-boomers beginning to make greater use of Medicare and 
Social Security, more of them, that if you keep piling on 
deficits and public debt for the next 10 years at truly 
historic levels that our ability to assure the soundness of 
Social Security and Medicare is going to be compromised and 
that, further, it is equally obvious that the debt tax, the tax 
that we all have to pay to finance the public debt, is going to 
continue to go up?
    Mr. SNOW. Congressman, I didn't see what OMB Director 
Daniels said. I don't see deficits way out into the future that 
way. I think this economy is going to grow at rates that are 
higher than we are showing in the numbers that you may have 
seen. It is not incorporated into the plan, the budget plan, 
the growth aspects of the President's proposal. It has 
incorporated into it the costs of the proposals. You know, if 
we can get a couple tenths of a point of revenue growth and get 
a couple tenths of a point reduction in expenditures and get a 
couple tenths increase in GDP, these numbers all of a sudden 
change dramatically, and that is what we ought to be working 
on.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from North Dakota wish to inquire?
    Mr. POMEROY. Thank you, Mr. Chairman. Mr. Secretary, you 
have already proven yourself to be an articulate representative 
of the Administration's fiscal policies as Secretary of the 
Treasury. Congratulations on your performance today.
    Mr. SNOW. Thank you very much.
    Mr. POMEROY. You have referred earlier in your testimony 
this afternoon to Social Security as essentially a pay-as-you-
go system. Presently, however, there is a surplus. Payroll 
taxes bring in more for Social Security than are spent on 
Social Security, is that correct?
    Mr. SNOW. That is correct.
    Mr. POMEROY. The balance, that cash that now comes in for 
Social Security, under the deficits contained in this budget, 
that cash will be spent on funding those government programs?
    Mr. SNOW. The balances will be credited; the surplus will 
be credited.
    Mr. POMEROY. I know there is going to be some IOUs. Mr. 
Secretary, I understand the IOU accounting business. The cash 
will be spent not on paying off the national debt, not held 
somewhere for future Social Security obligations. The cash will 
be spent to fund these other government programs, is that 
correct?
    Mr. SNOW. It is part of the general revenues. There is an 
IOU, as you know, to the Treasury.
    Mr. POMEROY. Right, it will be funneled into general 
revenues and will be spent.
    Mr. SNOW. That will be honored with the full faith and 
credit of the United States.
    Mr. POMEROY. Right. I understand that. Cash will be spent, 
and we will get an IOU.
    Yesterday, I was visiting with a university president from 
North Dakota. He indicates under the very difficult fiscal 
constraints facing our State, like so many States, tuition 
increases are about inevitable. He looks at 16 percent next 
year, maybe 14 percent the year after, if they don't do better 
in the legislature than is presently anticipated. That is about 
a 30 percent bump in tuition over 2 years. Students are already 
facing in my State, as they are across the country, record 
historic levels of tuition obligations. Student loan debts are 
the highest ever.
    Now, we were able to pass--the budget plan passed last year 
included a deductible feature for interest paid on student 
loans. Does your budget continue this student loan 
deductibility?
    Mr. SNOW. Congressman, I can't say that I know the answer 
to that.
    Mr. POMEROY. You have some resources with you, Mr. 
Secretary. I will await your answer.
    Mr. SNOW. I am sure Mitch Daniels would, and he will be 
here.
    Mr. POMEROY. I will await your answer right now, Mr. 
Secretary. I bet one of these people will be able to tell you 
whether or not the student loan deductibility continues or not.
    Mr. SNOW. Well, if they can, they are welcome to.
    Mr. POMEROY. Mr. Secretary, it is my belief that it expires 
2006 and it is not continued under your plan. In other words, 
the deductibility now allowed for student loan interest goes 
away, and it is not continued under the budget. Someone can 
correct me if they want. I think it is very important that we 
understand as tuitions go up the deductibility of interest paid 
by graduates struggling with those student loan obligations 
goes away and it will no longer be deductible.
    Mr. SNOW. I will tell you what I will do, I will get you 
the answer and submit it for the record, because I don't know 
it off the top of my head.
    [The information follows:]

    Response: Under current law, the above-the-line deduction for 
higher education expenses established by the Economic Growth and Tax 
Relief Reconciliation Act of 2001 sunsets after 2005.
    We share your concern for education. As you know, current law 
provides a variety of tax incentives to make attaining a higher 
education more affordable to students and their families. In addition 
to the above-the-line deduction, current law provides the Hope 
Scholarship Credit, the Lifetime Learning Credit, tax-free withdrawals 
from Coverdell Education Savings Accounts and from qualified tuition 
programs, tax-free redemptions of U.S. Savings Bonds used to pay higher 
education expenses, and a deduction for interest paid on certain 
student loans, among other incentives. The fiscal year 2004 budget 
proposals do not specifically include an extension of the above-the-
line deduction for higher education expenses, which will not expire 
until after 2005. As we continue to work on implementation of existing 
provisions, we will continue to examine tax provisions relevant to 
higher education and to consider education provisions in the budgets 
for future years.

                                 

    Mr. POMEROY. Okay. I am surprised your resources cannot 
answer that. I don't expect you in day number one----
    Chairman THOMAS. I will tell the gentleman I believe it is 
a safe statement to say for the remainder of President Bush's 
term it will be deductible.
    Mr. DOGGETT. That is 2 more years.
    Mr. POMEROY. My belief is it goes away in 2006, and that is 
not contested by the Administration. You know, the retirement 
savings program is something I have been looking at with great 
interest. I care a lot about it. Obviously, those that have the 
hardest time saving are those making the most modest amounts of 
income. Last Congress we addressed something that I think 
needed to be addressed. We enhanced the savings incentive for 
those earning modest incomes. We allowed them to save more in 
this tax-deductible IRA.
    Now, as I understand the proposal, you are not going to 
allow IRAs to be tax deductible after this year, is that 
correct?
    Mr. SNOW. The IRA, as I understand it, will continue but 
won't be able to be added to after this year.
    Mr. POMEROY. Right. So, you can't make next year, for 
example, a contribution to the IRA and deduct it from the 
amount you would otherwise pay tax on.
    Mr. SNOW. That is right. If you have an IRA, the IRA 
continues, though.
    Mr. POMEROY. That has been the traditional incentive to 
those earning $50,000 or under. We added to that with a small 
credit. I want to give your staff just kudos for the efforts 
they made to get this credit online and operative. They have 
done a great job with that. That is going to be an even 
stronger tax incentive for modest incomes, and that goes away 
under the proposal as well.
    So, as I understand it, you can't have a tax credit, you 
can't have a tax deductible in terms of making savings 
contributions, but you allow them to save greater amounts in 
the future.
    Now, for the family that can't save because they are very 
scrunched on disposable income, having higher limits where they 
can save tax free for the future, it really is not responsive 
to their problems, in my opinion.
    Chairman THOMAS. I thank the gentleman. The time of the 
gentleman has expired.
    Mr. POMEROY. May he have 30 seconds to respond?
    Chairman THOMAS. The gentleman's time has expired.
    Mr. SNOW. The whole plan is designed to encourage savings, 
not discourage it.
    Chairman THOMAS. Does the gentleman from Arizona wish to 
inquire?
    Mr. HAYWORTH. Thank you, Mr. Chairman. Mr. Secretary, 
welcome. Day 2 on the job, hearing number one in front of the 
Committee on Ways and Means, and I am sure you would agree it 
has been a very interesting afternoon.
    On the one hand, some of my colleagues saw fit to lecture 
you about the fiscal policy of the United States. Some of them 
offer very interesting revisionist histories for us. I am 
indebted to my friend from Ohio for helping to set the record 
straight. Some assume a prosecutorial role, even asking what 
you said and where were you on February 28 in talking to what 
publication.
    Finally, to my friend from North Dakota, I would simply 
say, with Arizona State, the heart of the new Fifth 
Congressional District of Arizona, we welcome all those out-of-
State students down to Arizona.
    Mr. POMEROY. It would be nice if they could deduct the 
tuition they pay when they come down there.
    Mr. HAYWORTH. Well, we look forward to working to continue 
that. Far be it for me to correct the Chairman, even to say I 
think that this will continue through the end of President 
Bush's first term. So we have gotten that all straight.
    Let me view perspectively what is transpiring with what you 
call the centerpiece of your proposal, of the President's 
proposal, and that is this bold stroke about dividends.
    It has been interesting at home because, as with most bold 
strokes, a lot of folks are very excited, some folks have 
questions. I was interested this morning to read on the op-ed 
page of my hometown newspaper a gentleman who opposed me in the 
last election embraced this wholeheartedly. So I thought that 
was good bipartisan support. However, perspectively, some 
questions do continue.
    There have been some questions raised that tax-exempt 
dividends received by shareholders will increase a 
shareholder's AMT liability. Are excluded dividends subject to 
the alternative minimum tax?
    Mr. SNOW. No, they will not be.
    Mr. HAYWORTH. So, we can put that to rest right now?
    Mr. SNOW. That can be put to the side.
    Mr. HAYWORTH. Mr. Secretary, it is a challenge we all 
confront, and people of good will can bring different points of 
view to this endeavor. Rather than offering a lecture, I simply 
want to say we look forward to working with you in the days 
ahead and working with the Administration. While the President 
proposes and the Congress disposes, we think we will have a 
very productive time. So, with that, I thank you for your time 
and your indulgence this afternoon. I thank the Chair.
    Chairman THOMAS. Does the gentleman from Kentucky wish to 
inquire?
    Mr. LEWIS OF KENTUCKY. Yes. Thank you, Mr. Chairman. Mr. 
Secretary, we think and hope that the recession is over, but 
the unemployment rate is still high and the business investment 
is still weak. Do you think it will help the economy for a 
short-term boost or do you think it is more important to look 
at long-term relief, and how does the Administration proposal 
address this post-recession weakness in the economy?
    Mr. SNOW. The proposal does both, Congressman. I think it 
will be a good boost for the economy in the short-term in 
creating about 500,000 additional jobs by the end of this year 
and well over 1 million by the end of next year. Its most 
important feature is probably it is just good economics. It 
makes the economy more efficient. Through the dividend 
proposal, it lowers the cost of equity, encourages the use of 
more equity, will lower debt equity ratios, will encourage 
companies to pay more dividends, will end the double taxation 
of corporate payouts and I think will have a very favorable 
effect on equity markets generally.
    It will also put more money in people's pockets today, and 
it will put money in their pockets that they can count on. I 
think one thing that we know from economics is that there is a 
big difference between a temporary enhancement in your take-
home pay and something you can count on for the long term. This 
they can count on year after year after year. That is going to 
change people's attitudes today I think and make them much more 
willing to go out and spend and buy things, and that helps this 
circular flow around this economy.
    The expensing provision is going to help. Small business is 
the biggest generator of jobs. Small business comes out a big 
winner on this. Small business, through the expensing and 
through the reduction in the marginal rates, will find that 
small business becomes more profitable. It will have more free 
cash flow. As they have more free cash flow, they will put up 
more help wanted signs, and there will be more good jobs.
    That is what this is really about. In the longer term I am 
confident this will put us on a better growth path so we can 
meet these huge obligations we have talked about for the future 
and these unfunded promises of the future that loom over us.
    Mr. LEWIS OF KENTUCKY. What about our senior citizens? How 
does the President's proposal help them meet the challenges of 
their retirement and investments that they have?
    Mr. SNOW. There are some 10 million seniors, I am told, 
some number like that, who are dividend recipients. Some, like 
my mother I mentioned earlier who is now deceased, she never 
had a lot of money, but that dividend was important to her. I 
think that will help older Americans considerably. It is 
surprising how many older Americans own stock and depend on 
dividends. So that provision will help them considerably.
    Mr. LEWIS OF KENTUCKY. Thank you. Very good.
    Mr. SNOW. Thank you.
    Chairman THOMAS. Thank you, Mr. Secretary. I do want to 
note that you have been in office 1 day, and I was disappointed 
that you were not able to answer every question, especially 
those about the future, because I thought we could have gotten 
a really good deal here if you could tell us what is going to 
happen. Unfortunately, the human condition is that we hopefully 
will plan as best we are able for the future in order to be 
prepared for tomorrow and the day after.
    I look ahead as we move forward in presenting the 
President's bill that there will be representation from 
Treasury during the markup. As we have broad hearings, several 
days of hearings, I do suggest that it would be helpful if you 
at least follow closely the discussions that we will be having 
with people, those who are in support, and I assume, people who 
are in opposition or offer alternatives to the President's 
position.
    Our job is to inform ourselves to the best of our ability 
to make the best decision as far as the Tax Code is concerned 
for the American people. I know you believe that is your 
responsibility as well, and this Committee looks forward to 
working with you in the near future, and, frankly, for your 
entire term as Secretary of the Treasury.
    Thank you very much for being with us today.
    Mr. SNOW. Thank you, Mr. Chairman. Let me say I intend to 
be fully engaged with you and your colleagues on this important 
work that lies ahead of us.
    Chairman THOMAS. I think you did a pretty good job for 1 
day in office. There being no further business, the hearing is 
adjourned.
    [Whereupon, at 4:20 p.m., the hearing was adjourned.]
    [Questions submitted from Chairman Thomas to Mr. Snow, and 
his responses follow:]

    QUESTION 1: Last year Treasury Under Secretary Gurule testified 
that ``transferring the U.S. Customs Service into the Department of 
Homeland Security will achieve the larger objectives of the President's 
proposal by (1) ensuring the proper balance between security and trade 
facilitation, (2) limiting the size of the Federal Government, (3) 
ensuring accountability and coordinated policymaking, and (4) promoting 
the collection and analysis of all information related to homeland 
security.'' Can you tell us how the transition will take place and what 
steps you will take to ensure that the transfer of the Customs Service 
to the new Department will achieve each of these goals?

    ANSWER: Treasury and Homeland Security have been working together 
to ensure that these goals are met make the transfer as smooth as 
possible. We believe that providing all necessary operational authority 
to Customs and retaining policy direction at Treasury for revenue 
issues will strike the proper balance between security and trade 
facilitation, prevent growth of government. Having the data collection 
function under Customs control ensures that information will be used 
for both security and revenue purposes

    QUESTION 2: In crafting the reorganization legislation, Congress 
left the organic authority for Customs within Treasury, creating a 
presumption that the authority should not be delegated. Does the 
Department of Treasury intend to delegate any specific authority or 
function to the Department of Homeland Security relating to the U.S. 
Customs Service? Will the Department of Treasury continue to perform 
its oversight role over Customs functions as it has always done, and if 
not, what changes are contemplated? Will the Department of Treasury 
remain fully staffed in order to continue to perform its oversight 
role? What office within the Department of Treasury will be charged 
with the oversight of the revenue collection functions of the Customs 
Service?

    ANSWER: The Administration is working closely with your staff to 
craft the appropriate delegation of this authority. We want to ensure 
that Customs has all necessary authority for security issues and the 
operational and day-to day aspects of administering the revenue 
functions. Certainly these are important questions and we need to 
attend closely to the details of the issues.

    QUESTION 3: Now that the Customs Service has been transferred to 
the new Department of Homeland Security what proposed budget changes 
have been made for all of Customs' statutory functions that have been 
transmitted in the current budget? How will this Congress be able to 
verify the Administration's commitment to Customs' trade mission?

    ANSWER: The President's FY '04 budget request details the proposed 
budgetary changes for all of Customs statutory functions. The 
Administration looks forward to working with Congress to ensure that 
the Nation's interests in Customs trade mission are met.

    QUESTION 4: How will the Treasury Department insure that Customs 
continue to be the lead office of the collection of trade data within 
the new Department of Homeland Security?

    ANSWER: Under the existing statutory scheme the Customs Service 
collects import entries, from which the bulk of trade statistics are 
generated. The Department of Commerce and the International Trade 
Commission also have important roles in trade data collection, as do 
the Department of Transportation, and several other agencies, depending 
on the nature of the import. Ensuring collection of good statistics in 
a manner least burdensome to the public requires an integrated 
government effort, an effort that the Administration intends to 
maintain.

    QUESTION 5: What will happen to the continuing development of the 
new Customs computer system, the Automated Commercial Environment 
(ACE), during the transition to the Department of Homeland Security? 
What steps will be needed to join the Customs computer system with that 
of the other agencies?

    ANSWER: The President's FY '04 budget request includes continued 
funding for Customs' new computer system, ACE, the Automated Commercial 
Environment. Part of the ACE project is the International Trade Data 
System or ITDS which links ACE to other agency computer systems.

    QUESTION 6: The Trade and Development Act of 2000, which includes 
landmark reforms to improve trade relations with Africa and with 
countries in the Caribbean Basin region, was signed into law on May 18, 
2000. The Treasury Department has yet to issue final implementing 
regulations to guide U.S. businesses and trading partners who are 
attempting to do business under these new programs. Can you explain the 
delay and indicate whether the Committee should expect a similar 
performance with respect to implementing regulations for the Andean 
Trade Promotion and Drug Eradication Act, which was signed into law on 
August 6, 2002?

    ANSWER: We expect that all three of these regulations to be issued 
in the very near future.

    QUESTION 7: In the Homeland Security Act Congress directed that 
customs user fees should be strictly accounted for and used for the 
commercial purpose for which they are collected. I notice that in the 
new budget for Homeland Security there is no longer a function line 
showing money spent on commercial operations as in years past. What is 
the Administration doing to ensure a strict accountability of fees and 
that funding for commercial operations are not diminished?

    ANSWER: The Treasury Department was not involved in the details of 
the budget for the Department of Homeland Security. Of course, user 
fees should be strictly accounted for and used only for the purposes 
established by law. The Administration is committed to ensuring that 
Customs commercial operations are fully funded in order to facilitate 
trade.

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